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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…

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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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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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

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Article
Publication date: 3 April 2020

Ameen Qasem, Norhani Aripin and Wan Nordin Wan-Hussin

The purpose of this paper is to examine the influence of financial restatements on the sell-side analysts' stock recommendations.

Abstract

Purpose

The purpose of this paper is to examine the influence of financial restatements on the sell-side analysts' stock recommendations.

Design/methodology/approach

The sample of this study is based on a dataset from a panel of 246 Malaysian public listed companies for the period 2008 to 2013 (651 company-year observations). This study employs feasible generalized least squares regression.

Findings

This study finds a negative and significant relationship between restated companies and sell-side analysts' stock recommendations, which means that sell-side analysts issue less favorable stock recommendations for restated companies.

Practical implications

The findings based on observations from an emerging economy complement the results of the US studies that analysts revise their earnings forecasts or recommendations downwards or drop coverage following financial restatements. The results of this study should be useful to capital market participants in understanding how analysts perceive and evaluate restated companies.

Originality/value

This paper expands the literature on financial restatements consequences in an emerging market which is largely unstudied. Prior research on analyst behavior towards restatements has focused on the consequences of restatements in terms of analyst following and forecast accuracy and dispersion. This study examines if and how the restatements affect the analysts' final output as reflected in the recommendation opinion, an area that has so far received little attention.

Details

International Journal of Managerial Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 6 June 2016

Peng Wu, Lei Gao, Zhibin Chen and Xiao Li

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…

Abstract

Purpose

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.

Design/methodology/approach

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

Findings

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.

Practical implications

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.

Originality/value

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.

Details

Chinese Management Studies, vol. 10 no. 2
Type: Research Article
ISSN: 1750-614X

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Article
Publication date: 1 March 2016

Kevin T. Rich and Jean X. Zhang

We investigate whether municipal financial manager turnover is associated with accounting restatements. This analysis is motivated by the notion that suspect financial

Abstract

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.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 28 no. 2
Type: Research Article
ISSN: 1096-3367

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Article
Publication date: 4 December 2017

Azam Eshagniya and Mahdi Salehi

This paper aims to examine the effect of financial restatement on changing the auditor in the following years.

Abstract

Purpose

This paper aims to examine the effect of financial restatement on changing the auditor in the following years.

Design/methodology/approach

The study uses data of 105 companies (735 company-years) listed on the Tehran Stock Exchange collected during the period 2008-2014. Logistic regression is used to test the hypotheses.

Findings

The results of hypotheses present that restatement does not cause auditor changes and that as the severity of a restatement increases, the auditor change in the following year of restatement also does not increase. Restating companies having strong governance do not go for auditor changes as compared with other companies. In addition, in companies that are restating, non-big auditor changes are not more likely than a big auditor. Also, in companies restating simultaneous with a CEO turnover, there is no possibility of auditor change. Furthermore, multinomial logistic regression showed that the adjustments resulting from the correction of errors and changes in procedures and the amount of adjustments do not cause auditor change in the following year. So, the results have shown that the restatement is not an important factor in changing auditor the next year.

Originality/value

The current study analyses the impact of financial restatement on auditor changes in a deep manner in a developing country like Iran.

Details

Asia Pacific Journal of Innovation and Entrepreneurship, vol. 11 no. 3
Type: Research Article
ISSN: 2071-1395

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Article
Publication date: 5 March 2018

Yuedong Li, Xianbing Liu and Qing Yan

The purpose of this paper is to discuss whether top management will assume their liabilities especially when financial restatement occurs, and,based on the “effective…

Abstract

Purpose

The purpose of this paper is to discuss whether top management will assume their liabilities especially when financial restatement occurs, and,based on the “effective supervision theory” and “strategic cooperation theory,” to examine whether an institutional investor is a supervisor or a cooperator considering the management turnover caused by financial restatement in the companies.

Design/methodology/approach

Using a sample of the A-share-listed companies from year 2010 to year 2014 and dividing financial restatement into fraudulent financial restatement and other financial restatement, the authors examine the relationship between financial restatement and abnormal management turnover, which usually is related to the management integrity or capacity. By using group test methods, the authors test the influence of the institutional investors’ shareholding on the relation between financial restatements and management turnover.

Findings

This paper finds that financial restatement can result in abnormal management turnover, especially the fraudulent financial restatement. The institutional investors usually are supervisors but when the shareholding of institutional investor is too high and the management turnover results from fraudulent financial restatement, the institutional investors may become cooperators with management in the companies. Besides, the institutional investors play the supervisory function more significantly in non-state-owned enterprises.

Originality/value

This paper expands literature of the institutional investors in the corporate governance area and provides a basis for future research in the area of the institutional investors’ governance effect. It divides financial restatements into fraudulent financial restatement and other financial restatement and examines the relationship between financial restatement and abnormal management turnover so as to provide evidence about whether the management will assume their responsibilities when there is financial restatement in the company. It also tests whether the institutional investors will play supervisor’s or cooperator’s function in state-owned and non-state-owned enterprises.

Details

Nankai Business Review International, vol. 9 no. 1
Type: Research Article
ISSN: 2040-8749

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Article
Publication date: 6 August 2020

Suhaily Hasnan, Mardhiahtul Huda Mohd Razali and Alfiatul Rohmah Mohamed Hussain

This paper aims to examine the effects of corporate governance and firm-specific characteristics on the incidence of financial restatement among Malaysian public listed firms.

Abstract

Purpose

This paper aims to examine the effects of corporate governance and firm-specific characteristics on the incidence of financial restatement among Malaysian public listed firms.

Design/methodology/approach

The elements of corporate governance consist of board size, board independence, multiple directorships, audit committee expertise, external audit quality and executive compensation. Meanwhile, the firm-specific characteristics consist of firm age, firm performance, firm leverage and firm liquidity. The agency theory has been used to guide the study. This study used a matched-pair sample that consisted of a sample of 49 restatement firms and 98 non-restatement firms between the years 2011 and 2016. Univariate (t-test and Pearson correlation) and multivariate (logistic regression) statistical techniques were used to test the hypotheses.

Findings

The results show that there is a negative and significant relationship between executive compensation and firm performance, and the incidence of financial restatement. In addition, there is a positive and significant relationship between firm leverage and the incidence of financial restatement. However, the other corporate governance and firm-specific characteristic variables included in the study were found to be insignificant with the incidence of financial restatement. This paper provides evidence that some form of corporate governance mechanisms and firm-specific characteristics, particularly executive compensation, firm performance and firm leverage, may influence the direction and magnitude of the incidence of financial restatement. The findings indicate that optimal executive incentives may align management interests with those of shareholders. In addition, greater performance and lower leverage levels minimise firms’ financial pressure and debt covenant violation risk, which may reduce the management tendency to misstate the financial statement, and consequently, minimise the likelihood of financial restatement.

Originality/value

The main value of this paper is the effect of corporate governance and firm-specific characteristics on the likelihood of financial restatement in Malaysia. The findings of this study provide useful insights for regulators to improve and reconsider the current regulations on corporate governance mechanisms.

Details

Journal of Financial Crime, vol. 28 no. 1
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 11 October 2019

Javad Oradi and Javad Izadi

The purpose of this paper is to investigate the association between gender diversity on the audit committees and the incidence of financial restatements.

Abstract

Purpose

The purpose of this paper is to investigate the association between gender diversity on the audit committees and the incidence of financial restatements.

Design/methodology/approach

Using a sample of 683 firm-year observations from Iranian listed companies for the period 2013 to 2017, this paper uses a logistic regression model to examine a research hypothesis related to the association between the presence of female members on the audit committee and the incidence of financial restatements.

Findings

After controlling for other restatement-related factors, the authors find that the presence of at least one female member on audit committees reduces the likelihood of the incidence of financial restatements. Robustness tests also confirmed this result. Moreover, the additional analyses show that independent and financial expert female members on audit committees are more strongly associated with a reduction in financial restatements. Further, the results suggest that the presence of female members on the audit committee can increase the likelihood of hiring higher quality auditors. Generally, the findings are consistent with the literature on gender diversity which suggests that women perform better in a monitoring role, are more conservative and make more ethical decisions.

Practical implications

The findings of this study could help with the understanding of broader participation of female directors on company boards and subgroups such as the audit committee, and of the improvement in corporate governance. Moreover, the findings can be of particular interest to monitoring authorities and policy makers in developing countries and send positive signals to them regarding the recommendation or requirement of gender diversity as a part of corporate governance mechanisms.

Originality/value

The present study contributes to the extant literature by providing empirical evidence on the effect of audit committee gender diversity on financial restatements. Furthermore, this study provides evidence on the more effective oversight and greater ability of independent and financial expert female directors, which has been significantly disregarded in the previous studies.

Details

Managerial Auditing Journal, vol. 35 no. 1
Type: Research Article
ISSN: 0268-6902

Keywords

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