Abstract
- This paper examines the spillover effect of a firm’s fraud events on credit market through the link of board interlock. A firm’sfraud revelation is conjectured to potentially make its lenders cautious about the interlocked firms due to the failed monitoringby the interlocked directors in the fraud firms. Using fraud events as shocks, a difference-in-difference analysis shows that leadlenders’ share in interlocked firms increases significantly after the exposure of fraud events of fraudulent firms. Furthermore,the spillover effect is more pronounced for firms facing greater information asymmetry. The results are robust to alternatemeasures, model specifications, and endogeneity concerns. Overall, the findings suggest that fraud events propagate throughthe board interlock channel in the form of increased share of lead lender’s ‘Skin in the Game’.