Research On The Effect Of Financial Restatements On Corporate Debt Financing Cost

Financial Restatements is a process of corporate correcting errors or supplementing missing information in their former financial reports. Corporates restate their former financial statement frequently, which has exerted a serious effect on efficiency of capital market. Financial Restatements means low quality and unreliability of accounting information, as a result, the extent of information asymmetry between corporates and investors goes severe, the pretty important foundation for investors to make correct decisions damaged, the economic consequences deriving from financial restatements are severe. In China, debt financing is the dominating channel for corporates to acquire external capital whose cost relates directly to profitability. And debt market differs from stock market, some conclusions suitable for stock market don’t apply to debt market. Therefore, it is necessary to research the effect of financial restatements on debt financing cost.This paper combining normative research method and empirical research method, choses from CNINF those listed companies who restate their former financial statements in 2011-2013 as study samples, and then selects separately basing on factors such as exchange location, industry and size for those study samples a listed company as a paired sample that didn’t restate their former financial statements in the three years. After analyzing the essential features of phenomenon of financial restatements from the angles of overall feature, restatements type, profit restatements and number of restatements terms, raising and verifying four theory-based hypotheses follow.In these three years, the average percentage of companies restating their former financial statements in all listed companies is9.03% which doesn’t take those companies restating their former interim financial reports into account, or this number will raise high, indicating in Chinese listed companies the phenomenon of financial restatements can’t been ignored and deserves much more attention. Among the companies restating their former financial statements, the majority with the amount of 366, percentage of 59.71%, tend to correct their former financial statement, reflecting such a fact that the situation of errors existing in companies’former financial statements is common.The average percentage of profit-restate companies in all financial restatement companies goes to 20.23%, and in 2011, this percentage reaches up to 28.04%. In addition, among the companies which restate their profits, most companies with thepercentage 68.55% adjust their profits down. Profit-restate behavior is serious. Companies restating their former financial statements are inclined to restate several items, which possibly increase the extent of information asymmetry between corporates and investors. In the part of empirical analysis, consistent with above-mentioned four essential features, this paper goes from four angles and draws conclusions as follows:(1)financial restatements have a significantly positive relationship with corporate debt financing cost, namely if a company restated former financial statements, creditors possibly asked for a higher rate as compensation of undertaking extra risk. (2)The effects of different types of financial restatements on corporate debt financing cost differ. Go a step further,①Both complementary announcements and correcting announcements raise significantly corporate debt financing cost, but creditors don’t react more negatively with correcting announcements although the nature of reporting correcting announcements is more serious than complementary announcements comparatively, which indicates creditors’overreaction with complementary announcements;②Creditors react most negatively with financial restatements that adjust profits down, although financial restatements that adjust profits up have a negative relationship with corporate debt financing cost, this relationship is non-significant, creditors react weak with it;③Compared with single item restatement, multi-item restatements lead to more severe information asymmetry, corporate debt financing cost is higher either.Rather than concentrating research focus on reaction of stock market coursed by financial restatements just like many other researchers did, this paper concerns the effects of financial restatements on corporate debt financing cost, and further the effects of different types of financial restatements on corporate debt financing cost, which contributes to understand deeply the economic consequences of it. This paper provides a reference to relevant research field.