Financial Statement Recasting and Credit Risk Assessment
47 Pages Posted: 29 Jan 2009 Last revised: 22 Sep 2012
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: Suggested Citation
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