Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

Abstract:     
We study the frequency of restatements by foreign firms listed on the U.S. exchanges. We find that the restatement rate by U.S. listed foreign firms is significantly lower than that of comparable U.S. firms and the difference depends on the home country characteristics of the foreign firm. Foreign firms from countries with a weak rule of law are less likely to restate than firms from strong rule of law countries are, despite companies from the weaker rule of law countries having higher levels of earnings management. After controlling for the materiality of the restatement, firms from weak rule of law countries are more likely to opt for less visible restatement disclosure methods. We interpret these findings as home country enforcement affecting firms’ likelihood of reporting existing accounting irregularities. This suggests that for U.S. listed foreign firms, less frequent restatements can be a signal of opportunistic reporting rather than high quality earnings.

Number of Pages in PDF File: 53

working papers series