Trust and Debt Contracting : Evidence from the Backdating Scandal

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. Conversely, we find no impact on the cost of public debt. Furthermore, after the revelation, firms engaged in backdating increase their reliance on public debt, and those without access to the public debt market experience capital constraints