Financial Restatements, Cost of Debt and Information Spillover: Evidence From the Secondary Loan Market

Abstract

In this paper, we investigate the effect of financial restatements on the debt market. Specifically, we focus on the secondary loan market, which has become one of the largest capital markets in the US, and ask the following: (1) whether financial restatements increase restating firm's cost of debt financing and (2) whether the information about restatements arrives at the secondary loan market earlier than at the stock market? Using 176 restatement data, we find significant negative abnormal loan returns and increased bid-ask spreads around restatement announcements. Furthermore, this negative loan market reaction is more pronounced when the restatement is initiated by either the SEC or auditors, and when the primary reason for restatement is related to revenue recognition issues. Additionally, we find restatement information arrives at the secondary loan market earlier than at the equity market, and that such private information quickly flows into the equity market. We also show that stock prices begin to decline approximately 30 days prior to the restatement announcements for firms with traded loans. However, we do not find such informational leakage for firms without traded loans. Collectively, the results of this paper suggest: (1) increased cost of debt financing after restatements and (2) superior informational efficiency of the secondary loan market to the stock market. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.

Evidence on the Association between Financial Restatements and Auditor Resignations

“…This study also contributes to the body of research investigating restatement consequences. Prior studies have documented that restatement companies experience negative consequences, including increased likelihood of litigation (Schmidt 2012;, negative market reactions , management turnover (Burks 2010;Hennes et al 2008;Desai et al 2006), and higher cost of capital (Kravet and Shevlin 2010;Park and Wu 2009;Hribar and Jenkins 2004). We show that in addition to these consequences, restatement companies have an increased likelihood of experiencing a costly auditor resignation, followed by hiring a new auditor of lower quality.…”

“…Companies announcing restatements often suffer adverse consequences, including stock price declines, higher cost of capital, executive turnover, and shareholder lawsuits (Schmidt 2012;Burks 2010;Kravet and Shevlin 2010;Park and Wu 2009;Hennes et al 2008;Desai et al 2006;Srinivasan 2005;Hribar and Jenkins 2004;). This study investigates another possible costly consequence: auditor resignation.…”

Dinâmica das republicações das demonstrações contábeis no período de 1997-2012

“…Entretanto, para que os atendam efetivamente, espera-se que as informações contábeis sejam verdadeiras, livres de erros e vieses (Brown & Tarca, 2007). Isso implica que o mercado financeiro, de crédito e de capitais, avalie os números contábeis divulgados, ponderando-os com o conjunto de informações disponíveis, não se restringindo aos dados contábeis (Park & Wu, 2009). Nesse sentido, o mercado, observando a ocorrência de republicações, ajustará suas estimativas, incorporando, ao modelo, fragilidades esperadas nos números contábeis das empresas que republicam e, principalmente, daquelas que o fazem sistematicamente (Jategaonkar, Lovata, & Sierra, 2012).…”

Can Management Turnover Restore the Financial Statement Credibility of Restating Firms? Further Evidence

“…The positive relationship between restatements and the cost of capital is applicable to the loan market. Park and Wu () document a negative association between restatements and abnormal loan returns, and a positive relationship between restatements and bid–ask spreads. In another study, Feldmann et al () find that, compared to non‐restating firms, those with restatements are subsequently charged higher audit fees.…”