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.
Original language | English |
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Pages (from-to) | 1117-1147 |
Number of pages | 31 |
Journal | Journal of Business Finance and Accounting |
Volume | 36 |
Issue number | 9-10 |
DOIs | |
Publication status | Published - Nov 2009 |
Externally published | Yes |
Keywords
- Cost of debt
- Financial restatements
- Information spillover
- Secondary loan market
ASJC Scopus subject areas
- Accounting
- Business, Management and Accounting (miscellaneous)
- Finance