Financial Statement Recasting and Credit Risk Assessment

47 Pages Posted: 29 Jan 2009 Last revised: 22 Sep 2012

See all articles by George E. Batta

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance

Ananda R. Ganguly

Claremont McKenna College - Robert Day School of Economics and Finance

Joshua G. Rosett

Claremont McKenna College - Robert Day School of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 27, 2012

Abstract

This paper examines the importance of adjustments to corporate financial statements for credit risk assessment. Prior research has tended to examine individual adjustments one at a time. Since correlations among adjustments and control variables may bias inferences when researchers examine a single adjustment and ignore other adjustments, our results provide important new information about previous research by documenting whether or not such bias exists. We find that financial statement recasting adjustments — which aim to better reflect firms’ indebtedness, financing costs, and recurring earnings than reported financial numbers — are reflected in bond yield spreads and have an economically significant impact on credit pricing and loss forecasting. Among individual adjustment categories, we find that those for off-balance-sheet leases, defined benefit pensions, and securitized debt have an economically significant impact on credit pricing and loss forecasting.

Keywords: credit analysis, financial analysis, credit pricing

JEL Classification: G12, G17, M41

Suggested Citation

Batta, George E. and Ganguly, Ananda Roop and Rosett, Joshua G., Financial Statement Recasting and Credit Risk Assessment (August 27, 2012). Robert Day School of Economics and Finance Research Paper No. 2009-01, Available at SSRN: https://ssrn.com/abstract=1333902 or http://dx.doi.org/10.2139/ssrn.1333902

George E. Batta (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth Street
Claremont, CA 91711
United States

Ananda Roop Ganguly

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth Street
Claremont, CA 91711
United States
(909) 607-0720 (Phone)
(909) 621-8249 (Fax)

HOME PAGE: http://www.claremontmckenna.edu/academic/faculty/profile.asp?Fac=519

Joshua G. Rosett

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-3625 (Phone)
909-621-8249 (Fax)

HOME PAGE: http://www.claremontmckenna.edu/academic/faculty/profile.asp?Fac=372

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