Accounting Restatements and External Financing Choices


  •  Accepted by Dan Segal. We thank Brad Badertscher, David Brown, David Farber, Jere Francis, Gerry Lobo, Shiva Rajgopal, Shyam Sunder, Ed Swanson, Senyo Tse, Terry Warfield, Li Zhang, two anonymous reviewers, and workshop participants at Chinese University of Hong Kong, Florida International University, Singapore Management University, Texas A&M University, Tsinghua University, University of Houston, University of Kentucky, University of Missouri, University of Minnesota, University of Wisconsin-Madison, the 2009 CAAA meeting, the 2009 AAA meeting, the 2009 Research Conference of the Universities of British Columbia, Oregon, and Washington, and the 2010 FARS conference for helpful comments. We thank the Social Sciences and Humanities Research Council of Canada, the Anderson Center at Wisconsin School of Business, and the School of Accountancy Research Center (SOAR) at Singapore Management University for financial support.


There is little research on how accounting information quality affects a firm’s external financing choices. In this paper, we use the occurrence of accounting restatements as a proxy for the reduced credibility of accounting information and investigate how restatements affect a firm’s external financing choices. We find that for firms that obtain external financing after restatements, they rely more on debt financing, especially private debt financing, and less on equity financing. The increase in debt financing is more pronounced for firms with more severe information problems and less pronounced for firms with prompt CEO or CFO turnover and auditor dismissal. Our evidence indicates that accounting information quality affects capital providers’ resource allocation and that debt holders help alleviate information problems after accounting restatements.