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Financial restatements, litigation and implied cost of equity


  • Katsiaryna Salavei Bardos
  • Dev Mishra


We re-examine the effect of financial restatements on the cost of equity vis-a-vis litigation risk. Specifically, we study the effect of litigation on post-restatement financing costs and whether market anticipates litigation before restatement announcement as evident from its effect on financing costs. In a sample of 91 restatements, although we find that the cost of equity increases subsequent to a financial restatement for all restating firms, the increase is substantially greater for firms facing litigation as a result of the restatement. We also find that investors do not adjust for the cost of equity before the announcement of a financial restatement for firms facing post-restatement litigation. Overall, our findings suggest that most of the increase in the cost of equity after restatement is concentrated in sued sub-sample and that the cost of equity is an important channel through which litigation associated with financial restatement is priced. The economic effect of post-restatement litigation is approximately 259 basis points increase in the firm's cost of equity.

Suggested Citation

  • Katsiaryna Salavei Bardos & Dev Mishra, 2014. "Financial restatements, litigation and implied cost of equity," Applied Financial Economics, Taylor & Francis Journals, vol. 24(1), pages 51-71, January.
  • Handle: RePEc:taf:apfiec:v:24:y:2014:i:1:p:51-71
    DOI: 10.1080/09603107.2013.864033

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    Cited by:

    1. Bardos, Katsiaryna Salavei, 2011. "Quality of financial information and liquidity," Review of Financial Economics, Elsevier, vol. 20(2), pages 49-62, May.

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