The Spillover Effects of Peer Firm Bankruptcy and Accounting Conservatism
48 Pages Posted: 17 Jul 2020 Last revised: 20 Jul 2020
Date Written: June 16, 2020
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: Suggested Citation