Trust and Debt Contracting: Evidence from the Backdating Scandal

67 Pages Posted: 3 Jul 2016 Last revised: 6 Feb 2021

See all articles by Veljko Fotak

Veljko Fotak

School of Management, University at Buffalo (SUNY); Sovereign Investment Lab, Baffi Carefin, Bocconi University

Feng Jiang

University at Buffalo - School of Management

Haekwon Lee

The University of Sydney

Erik Lie

University of Iowa - Henry B. Tippie College of Business

Date Written: November 3, 2017

Abstract

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

Fotak, Veljko and Jiang, Feng and Lee, Haekwon and Lie, Erik, Trust and Debt Contracting: Evidence from the Backdating Scandal (November 3, 2017). Available at SSRN: https://ssrn.com/abstract=2802892 or http://dx.doi.org/10.2139/ssrn.2802892

Veljko Fotak

School of Management, University at Buffalo (SUNY) ( email )

School of Management, University at Buffalo
236 Jacobs Management Center
Buffalo, NY 14260
United States
+1 716-645-1541 (Phone)

Sovereign Investment Lab, Baffi Carefin, Bocconi University ( email )

Via Roentgen 1
Milan
Italy

Feng Jiang

University at Buffalo - School of Management ( email )

344 Jacobs Management Center
Buffalo, NY 14260
United States
716-645-3225 (Phone)

Haekwon Lee (Contact Author)

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Erik Lie

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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