The effect of financial constraints on accounting restatementsSpanish evidence

  1. Cristina Martínez-Sola 1
  2. Sonia Sanabria-García 1
  3. Pascual Garrido-Miralles 1
  1. 1 Universitat d'Alacant
    info

    Universitat d'Alacant

    Alicante, España

    ROR https://ror.org/05t8bcz72

Revista:
European Research on Management and Business Economics

ISSN: 2444-8834

Any de publicació: 2024

Volum: 30

Número: 2

Pàgines: 11-20

Tipus: Article

DOI: 10.1016/J.IEDEEN.2024.100244 DIALNET GOOGLE SCHOLAR

Altres publicacions en: European Research on Management and Business Economics

Resum

This paper studies the effect of financial constraints and financial distress on accounting restatements; specifically, we empirically analyse whether several firm-specific characteristics—namely, the level of leverage, the cost of debt, and the interest coverage ratio—influence the likelihood of an accounting restatement. To do so, we use a sample of Spanish listed companies in the period from 2000 to 2017. The results show that the level and cost of debt and financial distress are associated with a higher incidence of accounting restatements. Our evidence is consistent with the argument that financially constrained firms—that is, firms with higher levels of leverage, especially in the short-term, facing a higher cost of debt—and financially distressed firms probably engage in more aggressive accounting practices or opportunistic reporting to clean up their financial statements, leading to an increase in accounting restatements. Financially constrained firms could be motivated to manage financial statements in order to prevent a debt covenant violation, obtain new financing or obtain financing at a lower cost. In the case of financially distressed firms, the motivation could be to prevent bankruptcy costs. The findings are consistent with previous literature, which has shown that firms employ accounting restatement as an instrument for earnings management.

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