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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.

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.

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.

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.

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.

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

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.

The purpose of this study is to explore the economic impact of financial restatements by major customers on the audit opinion of their suppliers, showing that non-financial information disclosure potentially helps auditors make better assessments.

Using a sample of China’s listed firms from 2007 to 2021, the authors aim to find the relationship between customers’ financial restatements and their suppliers’ audit opinions. Heckman selection model, placebo tests and other robustness checks are used as well.

The findings reveal that customers’ financial restatements have a significant effect on the likelihood of suppliers receiving modified audit opinions. This relationship is pronounced when suppliers face a higher level of financial constraints, exhibit poorer accounting conservatism or receive more negative media coverage. Additionally, this effect occurs through increased business risk and information risk, which heightens auditors’ perceived audit risk. Moreover, the study highlights the influence of switching costs, auditor expertise and restatement severity on this relationship.

Risks originating from customers can spread along the supply chain, emphasizing the necessity for auditors to give heightened attention to both the audited firms and their customer information. Moreover, regulators should carefully consider the important impact of customer information disclosures to maximize the protection of the interests of external information users.

This study not only confirms the crucial role of customer information disclosures in annual reports for stakeholders and auditors but also contributes to the existing literature on customer–supplier relationships.

This paper seeks to examine the effects of Malaysian Code on Corporate Governance on the nature of financial restatements in Malaysia and whether corporate governance characteristics are associated with financial restatements.

Data for this paper are obtained from annual reports that had been restated for the period of 2002‐2005 with firm‐years being the unit of observation. A control group comprising non‐restating firms is formed using match‐pair procedures where restated and non‐restated firms are matched by size, industry, exchange board classification, and financial year end. The data are subsequently analyzed using a t‐test, the Pearson correlation and logistic regression.

The results show that the primary reason for misstating the accounts is to inflate earnings. The nomination committee of the firms that restated is found to be less independent with higher managerial ownership. The logistic regression analysis indicates that the extent of ownership by outside blockholders deters firms from misstating accounts. Surprisingly, audit committee independence is associated with the likelihood of financial misstatement. Financial restatements, nevertheless, are not found to be associated with board independence, managerial ownership, and CEO duality. Finally, the results show that firms with high level of debts are more likely to commit in financial misstatement.

The research is significant as it provides evidence on the role of corporate governance, especially the independence of the nomination committee and extent of ownership by outside blockholders in Malaysia. It shows that outside blockholders is effective in disciplining managers so that the accounts so prepared are not misleading. The move in 2007 by the Malaysian Government to require companies audit committee to be composed of only independent and non‐executive directors, as well as requiring audit committee members to be financially literate, should be seen as important in ensuring the effectiveness of the audit committee.

This research is considered as the first study which examines the effects of corporate governance variables on the incidents of financial restatements in a developing country. The findings of this paper would be useful for policy makers in evaluating the importance of corporate governance in emerging countries, specifically on the issue of quality financial reporting.

The purpose of this paper is to investigate the impact of financial restatement on corporate dividend payment. Firms that announce financial restatements rupture their corporate reputation and adversely affect investors’ confidence. Consequently, firms must attempt to regain lost reputation and market confidence.

This study uses the US regulatory setting to examine the association between corporate dividend policy and financial restatement over the 2001–2017 financial years.

The findings evidence a robust positive association between financial restatement and dividend payouts, indicating that firms pay higher dividends following the year of financial restatement. Several sensitivity tests were conducted to confirm the robustness of the findings.

Prior research indicates that corporate dividend payouts enhance a firm’s reputation by reducing information asymmetry and providing a positive signal to investors regarding future financial performance. This study provides valuable evidence that dividend payout can be used as a channel for image restoration by firms with lost reputations because of financial restatement.

The purpose of this paper is to examine chief financial officer (CFO) qualification improvement associated with restatements and restatement characteristics (restatement materiality). The study is motivated by recent high-profile financial scandals and increasing instances of restatements which focus public attention on the role of CFOs in maintaining the integrity and quality of corporate financial reporting.

The study employs data composed of 80 restating firms matched with 80 non-restating firms with hand-collected CFO turnover information in the periods of 2003-2010. The research questions are tested in the logistic regression models.

The results provide some support that restating firms are more likely to hire new CFOs with greater accounting knowledge and overall CFO qualification (both accounting knowledge and CFO work experience) than non-restating firms. Furthermore, the authors also find that the number of restating years has a positive effect on CFO qualification improvement.

Although the authors fail to find strong evidence for the hypotheses (perhaps due to the small sample size) the authors provide the first evidence on the relation between CFO qualification improvement and restatement. Further research can examine the relation in the pre-SOX period, and investigate whether any of the firms experiencing CFO turnover have experienced any financial statement restatements in subsequent years.

The results extend the understanding of companies’ strategies for regaining reporting credibility in the wake of restatements. Restatements of erroneous accounting numbers (primarily earnings) have led to significant losses for investors, contributed to a series of corporate governance reforms and legislative changes including SOX 2002, and prompted efforts to identify the remedies restating firms take to improve reporting quality and restore credibility.

This paper aims to investigate, in China stock market, whether the reputation loss of a firm caused by financial restatements will lead to significant economic consequences such as financial distress and how a firm should respond to such a crisis.

This paper uses Chinese A-share listed firms from 2004 to 2013 as research samples to test research hypotheses using regression analyses.

This paper finds a significant relationship between restatements and financial distress, and such a relationship will be affected by both the type and the magnitude of restatements. More importantly, we find joint effects of restatements and state ownership on financial distress, which provides a unique contribution to the extant literature in restatement, financial distress and crisis management using Chinese stock markets data. It shows that ownership structure, affecting the firm reputation and crisis responses strategies, plays a significant role in consequences of restatements, and it is more important for state-owned enterprises (SOEs) to undertake an appropriate crisis response strategy to reduce the negative impact of restatements.

The results suggest that the damage to a firm’s reputation caused by restatements is affected by restatement type and state ownership. To reduce the negative consequences and avoid financial distress, firms should consider both the restatement type and their firm characteristics when deciding different actions to respond to restatements. In particular, SOEs should act in a more timely manner and take reputation-rebuilding actions such as taking the responsibility and making apologies and taking prompt remedial actions after restatements to regain the public trust and avoid more serious economic consequences. The Chinese government should strengthen their supervisions of SOEs and put more effort to help SOEs reduce administrative procedures, and to improve the efficiency of the implementation of recovery plans after restatements to reinstate firm credibility.

First, this paper is among the first to link financial restatement, including the type and magnitude of restatements, with financial distress, and the authors find a significant relationship between restatement type and financial distress in China stock markets. Second, this paper is the first to examine whether there is a joint effect of state ownership and restatements on financial distress. Third, this study examines how the magnitude and pervasiveness of restatements influence financial distress and find that both result in an increase of financial distress. Finally, this paper is among the first to connect crisis management and accounting literature to explain how a reputation loss caused by financial restatement may damage a firm’s value and subsequent performance, and based on which to suggest crisis-responses strategies.

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.

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.

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.

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.

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.

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.

This study tests the effect of accounting standards precision on financial restatements and the influence of accounting standards precision on different types of restatements (including errors and irregularities). What is more, the heterogeneity between accounting standards precision and financial restatements is verified in this paper. In the further analyses, the authors also examine the mediating roles and moderating roles on the correlation between accounting standards precision and financial restatements.

The focus is placed on an unbalanced panel of 18,766 samples over the period of 2007–2017.

The authors find that firms' restatements decrease when standards are more principles-based (low accounting standards precision). Especially, irregularities significantly decrease when firms' standards are more principles-based. What's more, the negative relationship between principles-based standards and restatements is more significant in “big four” accounting firms. Moreover, from the mediating effect results, the authors find that low accounting standards precision decreases a firm's financial reporting complexity and increases equity restriction, which in turn can help decreasing its financial misreporting. From the moderating effect results, the authors find that the higher the TOP1 and the more analysts following the firm, the higher the benefit of accounting standards precision to misstatements.

The results of this study provide a theoretical reference for accounting standard setters and are helpful to inform investors and regulators about the influence of Chinese accounting standards on restatements.

We investigate whether municipal financial manager turnover is associated with accounting restatements. This analysis is motivated by the notion that suspect financial reporting could limit the ability of stakeholders to assess the use of public resources (GASB, 2006). The evidence suggests that municipalities disclosing accounting restatements are more likely to see changes in the top financial manager position than a control sample of non-restatement municipalities. Overall, our findings are consistent with associations between financial reporting quality and the labor market for municipal financial managers, and imply that governments should consider adding the prevalence of accounting failures as an input in the evaluation of top financial managers.