Trust and Debt Contracting: Evidence from the Backdating Scandal
67 Pages Posted: 3 Jul 2016 Last revised: 6 Feb 2021
Date Written: November 3, 2017
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.
Keywords: Corporate culture; Cost of debt; Option backdating; Trust
JEL Classification: G32
Suggested Citation: Suggested Citation