Accounting Restatements and the Cost of Debt Capital

This study examines the bond market reaction 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 maturites. 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. Our findings fill a void in extant restatement literature that has focused virtually exclusively on the stock market reaction by examining the economic consequences of accounting restatements in the bond market.