Abstract
This study deals with firms’ ability to recognize unrealized revaluation earnings—a major pillar of IFRS—and focuses on a topic that to date has not been examined: do dividends from unrealized earnings impact a company’s risk of default? To investigate this, we manually gathered data on Israeli firms’ unrealized earnings and debt restructurings following IFRS adoption, and found that such distributions significantly increase—threefold—a company’s risk of requiring debt restructuring. Nonetheless, it appears that the increased risk is not properly priced by the market: the cost of debt for firms that distributed dividends from unrealized earnings is not significantly different from that of firms that never did so.