Financial restatements, litigation and implied cost of equity

• Autores: Katsiaryna Salavei Bardos, Dev Mishra
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 24, Nº. 1-3, 2014, págs. 51-71
• Idioma: inglés
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• Resumen

  • We re-examine 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. In a sample of 91 restatements, although 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 before 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.