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Trust and Debt Contracting: Evidence From the Backdating Scandal

Published online by Cambridge University Press:  11 April 2022

Veljko Fotak ,
Feng (Jack) Jiang Open the ORCID record for Feng (Jack) Jiang [Opens in a new window] ,
Haekwon Lee  and
Erik Lie
Veljko Fotak
Affiliation:
University at Buffalo School of Management and Università Bocconi Sovereign Investment Lab [email protected]
Feng (Jack) Jiang*
Affiliation:
University at Buffalo School of Management
Haekwon Lee
Affiliation:
University of Sydney Business School [email protected]
Erik Lie
Affiliation:
University of Iowa Tippie College of Business erik@[email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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We study the effect of trust on debt contracting. We find that, after the revelation of option backdating, borrowers that likely backdated their previous option grants pay higher interest rates on loans. This adverse effect is mitigated by CEO replacements. Results are similar for public debt, but only if a third party identified the backdaters. After the backdating revelation, firms that engaged in backdating increase their reliance on public debt, and those without access to the public debt market experience capital constraints.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 2 , March 2023 , pp. 615 - 646
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Gennaro Bernile, Michael Dambra, Xian Gu, Sahn-Wook Huh, Bill Kross, Bill Megginson, Yihui Pan, Kelly Shue, Inho Suk, Xinyuan Tao, Cristian Tiu, Alexander Wagner, Brian Wolfe, and Fei Xie, conference participants at the Financial Management Association (FMA) Annual Meeting, the Australasian Finance and Banking Conference, the Midwest Finance Association (MFA) Annual Meeting, the European Meeting of the FMA, and the UIBE International Conference, and seminar participants at Florida State University, the University of Missouri, Binghamton University (SUNY), and the University at Buffalo for their valuable feedback and comments.

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