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

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  • Jong Chool Park
  • Qiang Wu

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.

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  • Jong Chool Park & Qiang Wu, 2009. "Financial Restatements, Cost of Debt and Information Spillover: Evidence From the Secondary Loan Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9‐10), pages 1117-1147, November.
    • Handle: RePEc:bla:jbfnac:v:36:y:2009:i:9-10:p:1117-1147
    DOI: 10.1111/j.1468-5957.2009.02162.x
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    3. Ma, Chen & Kraten, Michael & Zhang, Junrui & Wang, Peng, 2014. "The Chinese experience: The impact of financial restatements on firm value and its implications on the investigatory practices of regulators," Research in Accounting Regulation, Elsevier, vol. 26(1), pages 1-11.
    4. Gigante, Gimede & Manglaviti, Davide, 2022. "The ESG effect on the cost of debt financing: A sharp RD analysis," International Review of Financial Analysis, Elsevier, vol. 84(C).
    5. Michael Ettredge & Susan Scholz & Kevin R. Smith & Lili Sun, 2010. "How Do Restatements Begin? Evidence of Earnings Management Preceding Restated Financial Reports," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(3-4), pages 332-355.
    6. Chen Chen & Ting‐Chiao Huang & Mukesh Garg & Mehdi Khedmati, 2021. "Governments as customers: Exploring the effects of government customers on supplier firms’ information quality," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 1630-1667, October.
    7. Mai Dao & Hua-Wei Huang & Ken Y. Chen & Ting-Chiao Huang, 2014. "Can Management Turnover Restore the Financial Statement Credibility of Restating Firms? Further Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 893-925, September.
    8. Chakrabarty, Bidisha & Seetharaman, Ananth & Wang, Weimin, 2014. "Institutional versus retail trades following financial restatements: The effect of Sarbanes-Oxley," Research in Accounting Regulation, Elsevier, vol. 26(1), pages 12-25.
    9. Elizabeth Gordon & Elaine Henry & Marietta Peytcheva & Lili Sun, 2013. "Discretionary disclosure and the market reaction to restatements," Review of Quantitative Finance and Accounting, Springer, vol. 41(1), pages 75-110, July.
    10. Meng-Chi Chueh & Shen-Ho Chang, 2022. "Effects of Directors and Officers Insurance on Earnings Management Strategies: Moderating Role of Restatement Announcements," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 15(1), pages 71-93, July.
    11. Sajad Ebrahimi, 2022. "The Effects of Ownership Structure on Borrowing Rate: The Case of Listed Iranian Companies," Millennial Asia, , vol. 13(1), pages 35-59, April.
    12. Lu Zhang & Yuan George Shan & Millicent Chang, 2021. "Can CSR Disclosure Protect Firm Reputation During Financial Restatements?," Journal of Business Ethics, Springer, vol. 173(1), pages 157-184, September.

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