Abstract
We study the impact of unethical behavior on debt contracting. We find that, after the revelation of option backdating, borrowers pay higher interest rates on loans, by about 19 basis points. This increase in the cost of debt is greater for loans originating from lenders with no prior relationship with the borrower, for geographically distant lenders, and for opaque borrowers. Our results suggest that the revelation of unethical behavior leads to an increase in perceived information risk. On the other side, we do not find any impact on the cost of public debt and find that, after the revelation, backdating borrowers increase their reliance on public, rather than private, debt.
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