Refinancing Risk and the Timing of Bad-News Disclosure: A Study of Vehicle Safety-Related Recalls
73 Pages Posted: 5 Feb 2018 Last revised: 4 Sep 2019
Date Written: September 1, 2019
Refinancing risk influences the timing of vehicle safety-related recalls. To quantify firms' exogenous demand for refinancing, I use the amount of previously issued long-term debt scheduled to mature by the end of the fiscal year in which to-be-recalled products are manufactured. Maturing debt does not predict recall events, typically matures in the last month of a firm’s fiscal year, and strongly predicts issuance activities in the fiscal year-end. High-maturing-debt firms, especially those holding less cash, are more likely to delay recalls for top-selling products by 1-2 quarters to avoid credit-rating downgrades prior to refinancing. The findings are not driven by systematic differences between firms with different exposures to refinancing risk, survive under a difference-in-differences approach, and remain robust when the end-of-year issuances are instrumented with maturing debt. NHTSA does not time investigations based on firms' maturing debt. Firms' self-claimed event chronologies are consistent with their recall delays.
Keywords: Corporate debt maturity, Refinancing risk, Voluntary disclosure, Vehicle safety recalls, NHTSA
JEL Classification: G14, G28, G32, G33, M40
Suggested Citation: Suggested Citation