Outline
- Abstract
- 1. Introduction
- 2. Related Literature
- 3. Empirical Methodology and Sample
- 3.1. Measurement of Externally Financed Growth
- 3.2. Sample Selection and Data
- 4. Empirical Results
- 4.1. Sensitivity Analyses
- 5. Conclusion
- References
رئوس مطالب
- چکیده
- 1. مقدمه
- 2. مرور ادبیات
- 3. روش شناسی و نمونهها
- 1.3. سنجش رشد تامین مالی خارجی
- 2.3. انتخاب نمونه و دادهها
- 4. نتایج تجربی
- 1.4. تجزیه و تحلیل حساسیت
- 5. نتیجه گیری
Abstract
Do restatements result in lower firm growth? One argument in support of this contention is that accounting restatements hurt contracting relations between the firm and outside parties such as a firm’s customers and suppliers, negatively impacting firm cash flows. The negative impact on cash flow reduces the level of internal cash holdings available for investment. Another argument is that restatements dampen firm growth by increasing the firm’s cost of external financing. We empirically evaluate these arguments by using the standard sales growth based financial planning model. In carrying out our analysis, we distinguish the effects of restatement on overall firm growth as well as its components of internally and externally financed growth. Our findings suggest that overall firm growth rates decline following a restatement. Furthermore, we find that accounting restatements have a greater adverse impact on externally financed growth rates. We also find that not all restatements yield identical effects: the impact of restatements is more pronounced for the subsample of firms identified to have undertaken the more egregious fraudulent reporting than the subsample of firms that reported restatements to correct previous accounting errors. We also find that firms with severe restatements, measured based on announcement period market reactions, have lower externally financed growth. Overall, our evidence highlights the adverse impact of restatement on firm growth, particularly through external financing.
Conclusions
Are restatements consequential? We answer this question by examining the impact of restatements on firm growth. Two non-mutually exclusive arguments warrant this inquiry. One view is that restatements hurt existing contracting relations. This reduces firm cash flows and impedes firm ability to pursue potentially profitable investments. A second view is that restatements create uncertainty and consequently limit firm ability to raise lower cost external funds for financing growth. This paper examines the impact of restatements on firm growth and attempts to identify the channel through which it arises. Our results suggest that firms that restate have lower realized growth rates. Decomposing firm growth into its components, we find restatements negatively impact subsequent externally financed growth rates.
Probing further, we find the firms identified to be involved in fraudulent reporting experience lower externally financed growth than other restatements. This finding reveals a compelling hierarchy in that fraud firms experience the largest punitive effect on externally financed growth but restatements due to error are also penalized compared to control firms that did not have a restatement. We also find that firms with larger negative market reactions during the announcement period have much lower externally financed growth after a restatement. Overall, our results provide evidence of a negative association between firm24 growth and restatements that is consistent with the argument that restatements impede firm growth by limiting access to lower-cost external financing.
Taken together, our study provides further insight on the destruction of shareholder wealth from accounting restatement as reflected by the decrease in firm growth due to the increased cost of external financing. Our finding that more egregious fraudulent accounting restatements lead to a larger decrease in firm growth as compared to restatements due to error will be of interest to regulators who are concerned about the consequences of accounting restatements and firms’ future prospects. Our study also highlights the merits of enacted statutes such as the Sarbanes-Oxley Act which severely penalizes managers for financial misreporting and thus limits opportunistic reporting that can lead to substantial loss of investor wealth.