Fraudulent financial reporting and corporate bond returns: Evidence from the Moscow Exchange

Abstract

Subject. The article considers the impact of misrepresentation of accounting (financial) statements on the owners of corporate bonds due to unfair actions of Russian issuers. Objectives. The study aims at the identification of the composition of falsification risk indicators that can be calculated by external users, in particular, by bondholders, based on the information disclosed in the financial statements; the development of methodological approach to assess the risk of falsification of reporting by issuers, when conducting transactions with corporate bonds. Methods. The study employs initial data preprocessing, calculation of risk indicators for falsification of accounting (financial) statements, scoring estimation of falsification by averaging the standardized ranks of risk indicators and subsequent cross-sectional analysis of excess corporate bond yields, based on RStudio development environment. The sampling population covers the period from January 2011 to December 2022. Results. I developed and tested a two-stage approach enabling to assess the impact of risk falsification of reporting information on bondholders. At the first stage, based on a system of indicators of reporting information falsification by issuers, which can be calculated by external users, scoring estimates of financial statement falsification are determined. At the second stage, cross-sectional effect on the bond market of Russian issuers is assessed due to information about possible falsification of financial reporting data by corporate issuers. The approach is universal. It enables to vary the composition of indicators, and can be freely used in any national bond exchange market. Conclusions. The premium for the risk of falsification of reporting information, taken into account in the prices of corporate bonds of Russian issuers, is statistically significant and amounts to about 4% per annum.