How Does External Financing Affect the Timing of Voluntary Disclosure: Evidence From Vehicle Safety Recalls

Abstract

Vehicle firms strategically time safety-related recalls in response to historically issued long-term debt prescheduled to mature by the end of the fiscal year in which defective products are manufactured. Maturing debt does not predict recall events, largely matures in the last month of a firm's fiscal year, and correlates with issuance activities in the fiscal year-end. High-maturing-debt firms delay to recall their top-selling products by several quarters to avoid credit-rating downgrades prior to refinancing, even holding constant the distance of manufacturing date to the fiscal year-end. The findings survive under a difference-in-differences approach. The effect of maturing debt on recall timing is more pronounced in firms holding less cash. Recall delay increases the likelihood of firms receiving consumer complaints. NHTSA does not time investigations based on corporate debt maturity structure. Firms' self-claimed event chronologies are consistent with their recall timing. Contrary to company statements and some investigation reports, top management is typically aware of product defects.