The impact of corporate fraud on director-interlocked firms: Evidence from bank loans

Abstract : We examine the impact of corporate fraud committed by one firm (the “fraudulent firm”) on other firms with interlocking directors (the “interlocked firms”), focusing on the debtholder side. We argue that the revelation of a fraudulent firm's fraud can damage the reputation of the interlocked firms because corporate governance can propagate via director interlocks. Empirically, we find that the interlocked firms' cost of debt is higher and the loan covenants become stricter after the fraud cases of the fraudulent firms are revealed. Consistent with the corporate governance propagation explanation, our results are weaker (stronger) for interlocked firms that have better (worse) pre‐event corporate governance standards. Our findings suggest that corporate fraud of fraudulent firms can affect other firms through director‐interlocks beyond shareholder value.
Complete list of metadatas

https://hal.archives-ouvertes.fr/hal-02108596
Contributor : Isabelle Celet <>
Submitted on : Wednesday, April 24, 2019 - 12:01:12 PM
Last modification on : Thursday, April 25, 2019 - 1:36:42 AM

Links full text

Identifiers

Collections

Citation

Tat-Kei Lai, Adrian C.H. Lei, Frank Song. The impact of corporate fraud on director-interlocked firms: Evidence from bank loans. Journal of business finance & accounting, 2019, 46 (1-2), pp.32-67. ⟨10.1111/jbfa.12362⟩. ⟨hal-02108596⟩

Share

Metrics

Record views

23