Reacting to a Peer Bankruptcy Announcement: Tension in Financial Reporting

44 Pages Posted: 17 Jul 2020 Last revised: 18 Apr 2023

See all articles by Mahmoud Delshadi

Mahmoud Delshadi

Adam Smith Business School - University of Glasgow

Ahmad Hammami

John Molson School of Business, Concordia University

Michel Magnan

Concordia University - Department of Accountancy

Date Written: April 18, 2022

Abstract

Through this paper we investigate if and how a peer’s bankruptcy affects financial reporting by other firms within the industry. Prior research documents that the bankruptcy filing of a peer firm has negative capital market effects on other firms within the industry (lower stock market value and higher cost of debt). We argue that firms within an industry experiencing peer bankruptcies modify their financial reporting to mitigate such negative capital market effects. However, tension arises as to whether such modification is toward more conservative accounting or the opposite. Using a large sample from 1980 to 2018, we find that following a peer firm bankruptcy filing, other firms within the industry exhibit a rise in conditional conservatism in their financial reporting. Our findings are robust to a battery of tests including the exclusion of distressed industries, the 2000 dot-com crash period, and the 2008 financial crisis period as well as employing an alternative proxy for conditional conservatism. The results are not significant for placebo bankruptcies one and two years before the actual bankruptcies. Further analyses show that the spillover effects are more pronounced for firms in industries with low concentration, those that exhibit higher leverage , and ones with strong governance mechanisms.

Keywords: Accounting conservatism, Bankruptcy, Spillover effects, Financial reporting

JEL Classification: G33, M41

Suggested Citation

Delshadi, Mahmoud and Hammami, Ahmad and Magnan, Michel, Reacting to a Peer Bankruptcy Announcement: Tension in Financial Reporting (April 18, 2022). Available at SSRN: https://ssrn.com/abstract=3635080 or http://dx.doi.org/10.2139/ssrn.3635080

Mahmoud Delshadi (Contact Author)

Adam Smith Business School - University of Glasgow ( email )

Glasgow, Scotland G12 8QQ
United Kingdom

Ahmad Hammami

John Molson School of Business, Concordia University ( email )

Montreal, Quebec H3G 1M8
Canada

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

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