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Financial statement recasting and credit risk assessment

Authors


  • We thank seminar participants at Claremont McKenna College, the Southern California Accounting Research Forum, and the American Accounting Association's annual meeting for invaluable comments. We also thank Brittany Watson and Asaf Bernstein for their many hours of assistance in constructing the dataset.

Abstract

This article examines the importance of adjustments to corporate financial statements for credit risk assessment. Prior research has tended to examine individual adjustments one at a time. As correlations among adjustments and control variables may bias inferences when researchers examine a single adjustment and ignore other adjustments, our results provide important new information about previous research by documenting whether or not such bias exists. We find that financial statement recasting adjustments – which aim to better reflect firms' indebtedness, financing costs and recurring earnings than reported financial numbers – are reflected in bond yield spreads and have an economically significant impact on credit pricing and loss forecasting. Among individual adjustment categories, we find that those for off-balance-sheet leases, defined benefit pensions and securitized debt have an economically significant impact on credit pricing and loss forecasting.

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