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Article
Publication date: 28 June 2019

Felice Matozza, Anna Maria Biscotti and Elisabetta Mafrolla

This paper aims to examine whether firms in polluting industries improve their environmental performance to effectively repair their financial reputation in the aftermath…

Abstract

Purpose

This paper aims to examine whether firms in polluting industries improve their environmental performance to effectively repair their financial reputation in the aftermath of an accounting restatement – a financial reputation-damaging event.

Design/methodology/approach

The authors test their hypotheses using multiple regression analysis of a sample of firms listed in International Financial Reporting Standards (IFRS)-adopting countries. They use a comparative empirical design in which a sample of firms that underwent a restatement (henceforth, restating firms) are compared with control groups of pair- and multiple-matched firms that did not undergo restatements (non-restating firms).

Findings

The study finds that restating firms have higher environmental performance in the aftermath of restatement events. Additionally, the authors demonstrate that this environmentally based reputation repair positively influences the financial reputation of the firms, as measured by analyst coverage and recommendations and which previously decreased because of the restatement event.

Practical implications

Because environmental levers are a substantial contextual factor in polluting industries, shifting the stakeholder debate to firms’ environmental commitment can improve financial stakeholders’ opinions and favour the repair of the multifaceted reputation of the financially damaged firm.

Social implications

With a worldwide growing attention to environment there is a critical need for understanding how polluting firms integrate sustainability and financial reputation. We demostrate that polluting firms recover from a financial failure pursuing their environmental performance.

Originality/value

Contributing to the behavioural theory of reputation repair and in line with the legitimacy perspective in environmental disclosure research, this paper shows that polluting firms recover from a loss to their financial reputation by diverting stakeholders’ attention towards the environmental field, thus restoring their financial reputation, as financial analysts value environmental performance improvement – a substantial contextual factor of polluting firms’ reputation repair process.

Details

Sustainability Accounting, Management and Policy Journal, vol. 10 no. 5
Type: Research Article
ISSN: 2040-8021

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Article
Publication date: 17 May 2011

Kevin W. Hee

The purpose of this paper is to investigate whether earnings restatements have a larger effect on the earnings quality (proxied by persistence) of restating firms relative…

Abstract

Purpose

The purpose of this paper is to investigate whether earnings restatements have a larger effect on the earnings quality (proxied by persistence) of restating firms relative to similar non‐restating firms and if restated earnings are more persistent than the originally reported earnings.

Design/methodology/approach

Cross‐sectional earnings persistence models are used to analyze how earnings persistence changes around restatements for both the originally reported earnings and the new restated earnings numbers. The study looks at restatements from 1997 through 2006.

Findings

The findings show that restating firms exhibit a larger increase in earnings persistence from the two‐year period before to the two‐year period after the restatements. Results also show that the restated portion of earnings is incrementally persistent relative to the originally reported earnings and the incremental persistence, although mitigated, is still significant after the passage of the Sarbanes‐Oxley Act. In addition, the evidence shows that core account restatements are associated with more persistent earnings relative to non‐core restatements in the two‐year period after the most recent restatement year.

Originality/value

The paper presents the first study to examine earnings restatements' impact on the future earnings persistence of restating firms in the context of the restated financial period as opposed to the restatement announcement period.

Details

Review of Accounting and Finance, vol. 10 no. 2
Type: Research Article
ISSN: 1475-7702

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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: 20 April 2020

Jundong (Jeff) Wang

This paper aims to investigate the association between analyst forecast dispersion and investors’ perceived uncertainty toward earnings.

Abstract

Purpose

This paper aims to investigate the association between analyst forecast dispersion and investors’ perceived uncertainty toward earnings.

Design/methodology/approach

A new measure for investors’ expectations of earnings announcement uncertainty is constructed, using changes in implied volatility of option contracts prior to earnings announcements. Unlike other proxies of uncertainty, this measure isolates the incremental uncertainty regarding the upcoming earnings announcement and is a forward-looking measure.

Findings

Using this new proxy, this paper finds a significant negative correlation between analyst forecast dispersion and investors’ uncertainty regarding the upcoming earnings announcements. Further tests show that this negative correlation is driven by analysts’ private information acquisition rather than analysts; uncertainty toward upcoming earnings announcements. Additional cross-sectional tests show that this negative relationship is more pronounced in the subsample with lower earnings quality.

Social implications

This paper helps to further the understanding of the information content of analyst forecast dispersion, particularly the ways in which they gather and produce private information and their incentives for so doing.

Originality/value

This paper introduces a new market-based and forward-looking proxy of earnings announcement uncertainty that should be useful in future research. This paper also provides original empirical evidence that analysts gather and produce an additional private information to the market when facing noisy signals and that their information reduces investors’ uncertainty toward upcoming earnings announcements.

Details

Review of Accounting and Finance, vol. 19 no. 3
Type: Research Article
ISSN: 1475-7702

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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: 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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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: 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: 29 June 2010

Shamsul Nahar Abdullah, Nor Zalina Mohamad Yusof and Mohamad Naimi Mohamad Nor

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…

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Practical implications

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.

Originality/value

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.

Details

Managerial Auditing Journal, vol. 25 no. 6
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 6 June 2016

Yang Xu and Lijuan Zhao

The purpose of this paper is to examine chief financial officer (CFO) qualification improvement associated with restatements and restatement characteristics (restatement…

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Research limitations/implications

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.

Originality/value

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.

Details

American Journal of Business, vol. 31 no. 2
Type: Research Article
ISSN: 1935-5181

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