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Title Two Essays in Corporate Finance
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Publication Date
Date Available
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University/Publisher Texas A&M University
Abstract In the first essay, "Why Won't You Forgive Me? Evidence of a Financial Misreporting Stigma in Bank Loan Pricing," we examine the relation between bank loan pricing and intentional financial misreporting. Firms that misreport financial information pay greater spreads on their bank loans for five years following their restatements, whether benchmarked against their pre-restatement loans or similar loans made to matched non-misreporting firms. Misreporting firms that promptly replace certain parties who are potentially related to the misreporting see their spreads fall to benchmark levels within three years following restatement. Large fractions of firms, however, do not promptly replace the potentially related parties and continue to pay premiums over benchmark spread levels for five years following restatement. The results suggest that misreporting creates a long-lasting and costly stigma, but that certain actions can reduce the duration of the stigma. In the second essay, "Can Shareholder-Creditor Conflicts Explain Weak Governance? Evidence from the Value of Cash Holdings," we look into whether shareholder-creditor conflicts generate costs large enough to prevent improvements in governance. If firms choose to remain weakly governed, some cost must prevent improvements. We address our research question by estimating the value of cash as a function of governance, leverage, and the interaction of the two. We find that governance increases the value of cash, but that leverage reduces the gain from strong governance. However, the magnitudes are far too small to explain why weak governance firms remain weakly governed. Our estimates suggest more than 80 percent of weakly governed firms would increase the value of their cash by improving governance. In fact, half of weakly governed firms would increase the value of their cash holdings by $0.35 or more per dollar held by improving governance. Our focus on cash holdings does not seem to drive our results, nor do endogenous governance choices or nonlinearities reverse our conclusions.
Subjects/Keywords Cost of debt; bank loans; financial restatements; fraud; shareholder-creditor conflicts; cash holdings; corporate governance
Contributors Johnson, Shane A. (advisor); Chava, Sudheer (advisor); Galpin, Neal E. (committee member); Gallmeyer, Michael F. (committee member); McAnally, Mary Lea (committee member)
Language en
Country of Publication us
Record ID handle:1969.1/ETD-TAMU-2011-05-9244
Repository tamu
Date Retrieved
Date Indexed 2017-09-06
Issued Date 2012-07-16 00:00:00

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…conflicts must prevent strengthening governance. 4 2. WHY WON’T YOU FORGIVE ME? Revealing that financial statements were deliberately misreported conveys two things about the misreporting firm, both of which should have adverse consequences for firms’ bank

…viii 3.2 3.3 3.4 3.5 3.6 3.1.1 Empirical Model . . . . . . . . . 3.1.2 Governance Measures . . . . . . . 3.1.3 Sample . . . . . . . . . . . . . . . Main Results . . . . . . . . . . . . . . . Excess and Optimal Changes in Cash . . Economic…

…57 3.2 Leverage Reduces the Net Benefits of Governance. . . . . . . . . . . . . . 61 3.3 Net Benefits of Governance: Governance Quintile Indicators. . . . . . . . 62 3.4 Value of Optimal and Excess Cash…

…73 3.5 Weighted Net Shareholder Gains from Improved Governance. . . . . . . . 77 3.6 Nonlinear Leverage Specifications. . . . . . . . . . . . . . . . . . . . . . . 81 3.7 Two-stage Least-squares Evidence…

…84 3.8 Leverage and Governance Effects on the Value of Non-cash Assets. 88 . . . x LIST OF FIGURES FIGURE Page 3.1 Raw Governance Levels. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 3.2 Governance Level Indicators…

…Johnson (2011) and Galpin and Huang (2011), repectively. In the first essay, “Why Won’t You Forgive Me? Evidence of a Financial Misreporting Stigma in Bank Loan Pricing,”1 we study the stigma of the adverse effect of intentional…

…financial misreporting on bank loan pricing and the mitigation of such effect associated with significant firm actions. Firms that misreport financial information pay greater spreads on their bank loans for five years following their restatements, whether…

…place on the accuracy of reported financial information, despite that they may also use soft information in their credit screening and monitoring. In the second essay, “Can Shareholder-creditor Conflicts Explain Weak Governance? Evidence from the Value…

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