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Article
Publication date: 21 September 2010

Mohammad G. Robbani and Rafiqul Bhuyan

The purpose of this paper is to examine the short‐term reactions of stock prices to the announcement of earnings restatement by the public companies listed in the Toronto…

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Abstract

Purpose

The purpose of this paper is to examine the short‐term reactions of stock prices to the announcement of earnings restatement by the public companies listed in the Toronto stock exchange in Canada.

Design/methodology/approach

The paper conducts an empirical study. For the purpose conducting the empirical study, a standard event study methodology has been utilized to examine the effect of restatement announcements on the stock returns. The dates of the announcement of restatement by each company have been collected and the effect of the announcement has been studied surrounding the announcement dates.

Findings

The results of empirical works indicate that, in general, the financial market reacts negatively to any restatement of earnings. This is evident from the fact that irrespective of the reasons for restatement, all restatements show a negative effect on the stock price. The impact of the restatement announcements is significant for all the prediction intervals. However, the long‐term reaction is more pronounced compared to short‐term reaction. In addition, the negative reaction is much higher for those reasons that are directly related to the earnings management than those that do not involve any active earnings management.

Research limitations/implications

Since the paper investigates only one stock exchange, it may have a limited application in other financial markets. Similar researches can be undertaken for other financial markets different in size, scope or geographical location.

Practical implications

The findings of the paper may have broad implications both for individual investors and corporate executives. The decisions made by executives on restatements affect stock price and hence the investors' rate of return. Since the general effect of such restatement is negative on the stock returns, it may portray a negative perception about the company. Therefore, the paper has implications on the decisions made by both the investors and the corporate executives.

Originality/value

The paper studied the Canadian stock market which was not studied in the past to examine the reactions of restatement.

Details

International Journal of Accounting & Information Management, vol. 18 no. 3
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 14 September 2021

Radwan Hussien Alkebsee and Ahsan Habib

Drawing on the premise that the media play a vital corporate governance role, this paper aims to investigate the association between media coverage and financial report…

Abstract

Purpose

Drawing on the premise that the media play a vital corporate governance role, this paper aims to investigate the association between media coverage and financial report restatements.

Design/methodology/approach

Based on a sample of Chinese listed companies over the period 2011–2015, the authors use ordinary least squares regression as well as a number of additional tests. To mitigate the endogeneity issue, the authors use a two-stage Heckman test and a propensity score matching model.

Findings

The authors document a negative and significant association between media coverage and restatements, suggesting that firms with high media coverage engage less in financial restatements. The authors further explore the moderating effects of internal control quality and state ownership on the association between media coverage and restatements. Regression results reveal that the governance role of the media is more pronounced for state-owned enterprises than for private firms. However, no significant difference in the disciplining effect of media coverage is found for firms with high, versus low, internal control quality.

Originality/value

The role of the media in corporate governance and financial reporting quality has been well documented. In emerging economies, such a role has been overlooked. As a result, the purpose of this study is to fill that void. Furthermore, prior research ignores the impacts of state ownership and the internal control environment on the media's governance role.

Details

Asian Review of Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 16 September 2021

Justin G. Davis and Miguel Garcia-Cestona

The purpose of this study is to examine the effects of chief financial officer (CFO) gender, board gender diversity and the interaction of both factors on financial…

Abstract

Purpose

The purpose of this study is to examine the effects of chief financial officer (CFO) gender, board gender diversity and the interaction of both factors on financial reporting quality (FRQ) proxied by restatements.

Design/methodology/approach

Restatements indicate inaccurate financial reporting. The authors use fixed effects conditional logistic regression models to compare firms with and without restatements matched by size, industry and year. The authors’ unique matched–pair sample consists of 546 listed US firms from the period 2005–2016.

Findings

The authors’ results provide evidence that restatements are less likely when the CFO is a woman and when a higher proportion of women serve on the board of directors (BOD). Considering the interaction effects, the authors find evidence that women on the BOD are more effective at reducing restatement likelihood when the CFO is also a woman. And that although female CFOs reduce restatement likelihood generally, they have no statistically significant effect on restatement likelihood when the BOD is all-male.

Originality/value

To the best of the authors’ knowledge, this study is the first that the authors know of to consider how FRQ is affected by the interaction effects of CFO gender and board gender diversity. The findings corroborate upper echelons theory and extend the understanding of the effects of managerial gender diversity at a time when firms face growing pressure to increase gender diversity at the highest levels. The unique sample, methodology and findings provide new insights into the impact of gender on FRQ that has important policy implications.

Details

Journal of Financial Reporting and Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 29 June 2021

Haiyuan Yin and Meng Sun

This paper aims to enrich the scope of the influence of media reports on the stock risk, and it also provides a path to support the research on the relationship between…

Abstract

Purpose

This paper aims to enrich the scope of the influence of media reports on the stock risk, and it also provides a path to support the research on the relationship between media reports and idiosyncratic risks in the stock market.

Design/methodology/approach

The authors select financial restatement samples of listed companies in China from Jan 2015 to Dec 2017 to explore the impact of the financial restatement on the idiosyncratic risk of stocks. Further, the financial restatement that has more media attention may play a more significant role in promoting the idiosyncratic risk.

Findings

The authors found that the financial restatement of listed companies has a significant positive effect on the idiosyncratic risk of stocks. Specifically, the idiosyncratic risk changed five months before the restatement. After the restatement, the idiosyncratic risk increased by 83.47 in five days then decreased slowly, which lasted about one year. The restatement caused by sensitive issues and legal issues has a greater impact on the idiosyncratic risk. Both current restatement and delayed restatements will increase the idiosyncratic risk of stocks, but the impact of the latter is higher than the former.

Research limitations/implications

Possible deficiencies in the paper are that the number of restatements caused by major accounting errors is low. Therefore, no regular conclusions were drawn on the impact of the financial restatement caused by major accounting errors.

Practical implications

The conclusions provide a basis for targeted supervisory measures on the restatements of listed companies. The increase in financial restatements is closely related to the lack of governance mechanisms in the stock market. For investors, although the mystery of idiosyncratic volatility exists significantly in the market, the company's valuation level will affect the relationship between the idiosyncratic risk and expected return. Investors should pay attention to the intrinsic value of the company and should not blindly pursue stocks with a low idiosyncratic risk.

Originality/value

These conclusions may enrich the scope of the influence of media reports on the stock risk and also provide a path to support the research on the relationship between media reports and idiosyncratic risks in the capital market.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Book part
Publication date: 6 November 2012

Vijay Gondhalekar, Mahendra Joshi and Marie McKendall

Purpose – This study examines both the short- and long-term share price reaction to announcements of financial restatements cited in the U.S. General Accounting Office…

Abstract

Purpose – This study examines both the short- and long-term share price reaction to announcements of financial restatements cited in the U.S. General Accounting Office (2006) database.

Methodology – It uses the augmented four-factor Fama-French model for assessing share price reaction.

Findings – The study finds that the average cumulative abnormal return (CAR) for a sample of 553 restatements (by 437 companies) is significantly negative (−1.58) for the three-day window surrounding the day of announcement. The average CAR for the one-year period prior to the announcement (−9.6%) and for each of the four years after the announcement is negative as well, with the average CAR for the four years adding up to −22%. The study also documents differences in CARs based on the entity prompting the restatement (company, auditor, and Securities and Exchange Commission), the reason behind the restatement (revenue, cost, reclassification of item, etc.), and for one-time versus repeat offenders.

Social implications – Taken together, the findings indicate that financial restatements impose significant short-term as well as long-term costs on shareholders.

Originality/Value – The evidence about long-term share price reaction to financial restatements is missing in prior research. The relationship between long-term and short-term share price reaction to financial restatements fails to suggest systematic over/underreaction by the market.

Details

Advances in Financial Economics
Type: Book
ISBN: 978-1-78052-788-8

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Book part
Publication date: 20 October 2015

Matthew A. Notbohm, Jeffrey S. Paterson and Adrian Valencia

Prior research finds evidence that audit quality is positively associated with the joint purchase of tax nonaudit services (NAS) and concludes that jointly provided tax…

Abstract

Prior research finds evidence that audit quality is positively associated with the joint purchase of tax nonaudit services (NAS) and concludes that jointly provided tax services result in audit-related knowledge spillovers that lead to improved audit quality. We extend this line of research. We examine the relation between auditor-provided tax services and restatements and determine whether this relation differs when the auditor is a small or large accounting firm. We also examine whether the Securities Exchange Commission’s restrictions on certain tax consulting practices (SEC, 2006) altered this relation. Specifically, we measure whether the probability of financial statement restatements varies with (1) variation in accounting firm size (measured as PCAOB annually inspected firms versus PCAOB triennially inspected firms), and (2) the joint provision of audit and tax services. We find a negative relation between auditor-provided tax services and restatements which is consistent with prior research. We also find that this relation is significantly more negative when the auditor is a small accounting firm. Finally, we find that the lower probability of a restatement associated with the joint provision of audit and tax services persists regardless of auditor size after the SEC-imposed restrictions on certain tax consulting services in 2006. Our study provides evidence that accounting firms, and particularly small accounting firms, benefit from knowledge spillovers when jointly providing audit and tax services and these benefits lead to improved audit quality. Prior research concludes that large auditors provide higher audit quality and that the provision of tax services improves audit quality. Our results provide evidence that audit quality improvements are greater for small auditors and their clients. This improvement narrows that audit quality gap between large and small auditors. We do not find evidence that the SEC’s restrictions on certain tax consulting services altered the relation between audit quality and tax services.

Details

Advances in Taxation
Type: Book
ISBN: 978-1-78560-277-1

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Book part
Publication date: 20 May 2011

William D. LaGore, Lois S. Mahoney and Linda Thorne

Prior research shows that after financial restatement, firms' corporate governance practices are strengthened (Farber, 2005; LaGore, 2008) as firms respond by increasing…

Abstract

Prior research shows that after financial restatement, firms' corporate governance practices are strengthened (Farber, 2005; LaGore, 2008) as firms respond by increasing their disclosure practices and making executives more accountable (Arthaud-Day, Certo, Dalton, & Dalton., 2006). Nevertheless, it has not been established whether the impact of restatement extends to the domain of voluntary corporate social responsibility (CSR) disclosures. To address this question, we compare firms CSR scores and the association between executives' compensation and firms CSR scores before and after restatement. We use a sample of 44 U.S. firms in the two-year period before and after a financial restatement announcement. In firms that had undergone restatement, we found a significant increase in CSR strengths and CSR weaknesses that resulted in a net decrease in total CSR. In addition, we found a stronger association between bonus and CSR after restatement. This contributes by furthering our understanding by suggesting that voluntary CSR disclosures are indirectly impacted by restatement. Our findings are useful in understanding the pervasiveness of restatement on a firm's disclosures and operations and also in gaining insight into the comparability of CSR disclosures after restatement.

Details

Research on Professional Responsibility and Ethics in Accounting
Type: Book
ISBN: 978-1-78052-005-6

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Article
Publication date: 13 January 2020

Nourhene BenYoussef and Mohamed Drira

Prior research has examined the impact of corporate governance mechanisms, including external auditing, on accounting restatements likelihood. However, little is known…

Abstract

Purpose

Prior research has examined the impact of corporate governance mechanisms, including external auditing, on accounting restatements likelihood. However, little is known about auditor’s monitoring role in restatement disclosure practices. The purpose of this study is to address this gap by investigating the impact of auditor’s oversight on the timeliness of accounting restatement disclosures as measured by the length of the restatement dark period.

Design/methodology/approach

The study examines panel data from a sample of restating publicly traded US firms. Negative binomial regression is used to analyze the data because the dependent variable is a count variable and is over-dispersed.

Findings

The main study’s results indicate that longer auditor tenure and non-audit services provision improve restatement disclosure timeliness. Conversely, companies whose auditors exerted abnormally high levels of audit effort have longer restatement dark periods.

Originality/value

This study is the first archival research that focuses on auditor’s monitoring role and its impact on the timeliness of restatement disclosures. By doing so, this study contributes to the auditing academic research, professional practice and regulation by providing empirical evidence on an exasperating issue for all participants in the financial markets. In addition, it provides a better understanding of auditor’s monitoring role in the accounting restatement process and offers insights to policymakers, practitioners and investors interested in corporate financial transparency and corporate governance.

Details

International Journal of Accounting & Information Management, vol. 28 no. 1
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 9 May 2020

João L.F.R. Fragoso, Rúben M.T. Peixinho, Luís M.S. Coelho and Inna C.S. Paiva

The purpose of this paper is to discuss the most relevant issues related to the impact of financial restatements in the dynamics of financial markets and identify several…

Abstract

Purpose

The purpose of this paper is to discuss the most relevant issues related to the impact of financial restatements in the dynamics of financial markets and identify several research gaps to be investigated in future research.

Design/methodology/approach

The methodology is based on a systematic review of the literature described by Tranfield et al. (2003). The final sample includes 47 academic papers published from 1996 to 2019.

Findings

Papers in this domain discuss three main topics: how the market prices the announcement of a financial restatement; how financial restatements affect the announcing firm’s cost of capital and how financial restatements affect firms’ reputation. There are several issues to explore in future research, including whether financial restatements affect the dynamics of financial markets in Europe, whether the market fully and promptly assimilates the information content of a restatement, the role of financial analysts’ information disclosures in this process or how regulators may improve the way they provide investors with timely information about firms’ restating problems.

Research limitations/implications

There is always some degree of subjectivity in the definition of the keywords, search strings and selection criteria in a systematic review. These are all important aspects, as they delimitate the scope of the study and define the sample of papers to be reviewed.

Practical implications

The answers to the research questions identified in this paper may provide regulators with information to improve financial accounting and reporting standards and strengthen investors’ confidence in accounting information and the dynamics of financial markets.

Originality/value

This paper systematically reviews the relevant literature exploring the connection between financial restatements and the dynamics of financial markets. It contributes to the academic community by identifying several research questions that may impact the theory and practice related to accounting quality and capital markets.

Details

Meditari Accountancy Research, vol. 28 no. 6
Type: Research Article
ISSN: 2049-372X

Keywords

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Article
Publication date: 11 June 2020

Shayan Farhangdoust and Lida Sayadi

The present study seeks to shed further light on the effectiveness of Basu (1997) and Khan and Watts' (2009) differential timeliness metrics in detecting predictable…

Abstract

Purpose

The present study seeks to shed further light on the effectiveness of Basu (1997) and Khan and Watts' (2009) differential timeliness metrics in detecting predictable differences in conservatism following corrections of restated earnings.

Design/methodology/approach

Using cross-sectional and time-series analyses for companies listed on the Tehran Stock Exchange during 2009–2013, the results indicate lower conservatism for restating firms as compared to their counterparts during prerestatement period.

Findings

Using cross-sectional and time-series analyses for companies listed on the Tehran Stock Exchange during 2009–2013, the results indicate lower conservatism for restating firms as compared to their counterparts during prerestatement period. In contrast, our findings are indicative of higher conservatism among these restating firms during the years of restatements. Moreover, the time-series approach captures a higher conservatism for the restating firms during restatement years than prerestatement periods. Overall, these results provide insight into the usefulness of the metrics used in the restatement setting.

Originality/value

Similar to recent papers, the present study seeks to shed further light on the ability of Basu-based coupled with Khan–Watts-based measures of conservatism to detect situations in which companies' earnings are known to be significantly restated.

Details

Asian Journal of Accounting Research, vol. 5 no. 1
Type: Research Article
ISSN: 2443-4175

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1 – 10 of over 2000