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Accounting Restatements and the Cost of Debt Capital
Charles Shi,
Univeristy of California at Irvine
William Zhang, Lehigh University
ABSTRACT. This is the first study that examines the bond market reactions to accounting restatement announcements and the impact of the announcements on the cost of restating firms’ new bond issues. We document that the bonds of restating firms on average react negatively to the restatement news. Cross-sectional analysis of bond market reactions indicates that the magnitude of negative excess bond returns is significantly greater for the restating firms that experience more severe accounting restatements in terms of dollar amounts and the fraudulent nature of restatements, or whose restatements are prompted by the firms themselves, or whose bonds have shorter maturities. Moreover, we find that the restating firms pay higher risk premiums for new bonds issued subsequent to the restatements relative to new bonds issued prior to the restatement events. The findings of this study fill a void in the existing restatement literature that has focused exclusively on the stock market.
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