Financing activities after accounting restatements: an examination of SEOs and PIPEs

Abstract

Accounting restatement is generally viewed as an event that can exacerbate a restating firm’s financing environment. We examine restating firms’ financing activities in the post-restatement environment. We document significant declines in the frequency of financing activities as well as the dollar amount of net cash provided by financing activities. This suggests that restating firms’ ability, and perhaps desire, to raise external funds is impaired by their restatements. We examine three specific equity financing activities: seasoned equity offerings (SEOs), SEO withdrawals, and private investments in public equity (PIPEs). Our findings indicate: (1) The restating firms are much less likely to issue SEOs or PIPEs when their restatements involve accounting irregularity; (2) Although restatements have a negative marginal effect on the cost of issuing SEOs measured by the fee charged by investment agents, the average fee for the post-restatement SEOs and PIPEs are actually lower than other SEOs and PIPEs. Further, restatement has no significant marginal effect on the cost of issuing PIPEs; (3) The decision to withdraw a pre-registered SEO does not appear to be affected by accounting restatement. Overall, our findings suggest that certain group of restatement firms can overcome the presumably unfavorable financing environment inflicted by their accounting restatements.