Published online by Cambridge University Press: 11 April 2022
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.
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.