The Consequences of Aggressive Financial Reporting: The Case of External Financing*

56 Pages Posted: 3 Sep 2009

See all articles by Xia Chen

Xia Chen

Singapore Management University

Qiang Cheng

Singapore Management University

Alvis K. Lo

Boston College

Multiple version iconThere are 2 versions of this paper

Date Written: August 11, 2009

Abstract

In this paper, we investigate how aggressive financial reporting affects a firm’s ability to obtain external funds and its choices of external financing. First, we find that after earnings restatements, firms become significantly more financially constrained compared to a group of control firms with similar size and operating performance. Second, consistent with the increase in financial constraints, we find that restatement firms are less likely to obtain external financing after restatements. Third, for restatement firms that do obtain external financing after restatements, we find that they rely more on private debt financing and less on equity financing, consistent with increased information asymmetry after earnings restatements. Our investigation is important because it sheds light on the impact of aggressive financial reporting on firms’ financing options and on what causes, at least partially, the dramatic decrease in firm value upon the detection of aggressive financial reporting.

Keywords: earnings restatements, external financing, financial constraint

JEL Classification: G32, M40

Suggested Citation

Chen, Xia and Cheng, Qiang and Lo, Alvis K., The Consequences of Aggressive Financial Reporting: The Case of External Financing* (August 11, 2009). AAA 2010 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=1447505 or http://dx.doi.org/10.2139/ssrn.1447505

Xia Chen (Contact Author)

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Alvis K. Lo

Boston College ( email )

Carroll School of Management, Fulton 542
140 Commonwealth Ave.
Chestnut Hill, MA 02467
United States
617-552-8674 (Phone)

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