The book claims that a company might be motivated to understate its earnings to get favorable terms from creditors.
To me, that makes no sense. If you make LESS money, aren’t people MORE afraid that you won’t be able to pay back loans?
EDIT: NVM I think I see what they’re saying.
The idea is that you already have a loan, and that if you can demonstrate that it will be impossible (or, at least, very difficult) for you to repay that loan on its original terms, the lender may be disposed to relax the terms rather than risk having you default. The lower your net income, the stronger your case that it will be impossible (or, at least, very difficult).
Yeah that makes more sense, though at first it didnt make sense bc I was thinking in personal finance terms. Okay, in personal finance, you run the risk of destroying your credit report for 7-10years.
Is there an equivalent in the corporate world? If you’re the CFO and you pull this stunt in 2008 or 2009 at Citibank, are you going to be able to start with a clean slate at Wells Fargo in 2014, or is there some database that banks all have access to?
I’m not intimately familiar with the world of coporate debt financing, but I cannot imagine that there isn’t the equivalent of a corporate FICA score. There are bond credit ratings, of course, but there must be something available to banks who are potential lenders.