Financial Restatements, Litigation, and Implied Cost of Equity

Applied Financial Economics 24 (1), pages 51-71, 2014

38 Pages Posted: 24 Jan 2020

See all articles by Katsiaryna Bardos

Katsiaryna Bardos

Fairfield University

Dev R. Mishra

University of Saskatchewan - Edwards School of Business

Date Written: January 1, 2014

Abstract

We reexamine the effect of financial restatements on the cost of equity vis-a-vis litigation risk. Specifically, we study the effect of litigation on post-restatement financing costs and whether market anticipates litigation before restatement announcement as evident from its effect on financing costs. While we find that the cost of equity increases subsequent to a financial restatement for all restating firms, the increase is substantially greater for firms facing litigation as a result of the restatement. We also find that investors do not adjust for the cost of equity prior to the announcement of a financial restatement for firms facing post-restatement litigation. Overall, our findings suggest that most of the increase in the cost of equity after restatement is concentrated in sued sub-sample and that the cost of equity is an important channel through, which litigation associated with financial restatement is priced. The economic effect of post-restatement litigation is approximately 259 basis points increase in the firm’s cost of equity.

Keywords: Cost of Equity, Litigation, Financial Restatements, Earnings Forecasts, Analyst Forecasts

JEL Classification: G14, G12, K22, M41

Suggested Citation

Bardos, Katsiaryna and Mishra, Dev R., Financial Restatements, Litigation, and Implied Cost of Equity (January 1, 2014). Applied Financial Economics 24 (1), pages 51-71, 2014, Available at SSRN: https://ssrn.com/abstract=3512967 or http://dx.doi.org/10.2139/ssrn.3512967

Katsiaryna Bardos (Contact Author)

Fairfield University ( email )

Dolan School of Business
1073 North Benson Road
Fairfield, CT 06824
United States

Dev R. Mishra

University of Saskatchewan - Edwards School of Business ( email )

Edwards School of Business
Saskatoon, Saskatchewan S7N 5A7
Canada
306-966-8457 (Phone)
306-966-2515 (Fax)

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