The Spillover Effects of Peer Firm Bankruptcy and Accounting Conservatism

48 Pages Posted: 17 Jul 2020 Last revised: 20 Jul 2020

See all articles by Mahmoud Delshadi

Mahmoud Delshadi

Concordia University

Michel Magnan

Concordia University - Department of Accountancy

Date Written: June 16, 2020

Abstract

This paper investigates 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 a 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 may modify their financial reporting to mitigate such negative capital market effects. Using a large sample from 1980 to 2018, we find that firms exhibit more conservatism in financial reporting following a peer firm bankruptcy filing. The result is robust to the exclusion of distressed industries, the 2000 dot-com crash period, and the 2008 financial crisis period. The results are insignificant for placebo bankruptcies one and two years before the actual bankruptcies. Further analysis shows that the spillover effects are more pronounced for firms in low concentrated industries, for firms that undertake new equity or debt financing, and for firms with a higher percentage of independent directors.

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

JEL Classification: G33, M41

Suggested Citation

Delshadi, Mahmoud and Magnan, Michel, The Spillover Effects of Peer Firm Bankruptcy and Accounting Conservatism (June 16, 2020). Available at SSRN: https://ssrn.com/abstract=3635080 or http://dx.doi.org/10.2139/ssrn.3635080

Mahmoud Delshadi (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada
H4B 1S1 (Fax)

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

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