Empirical Evidence on Repeat Restatements

Abstract

This study examines the characteristics of repeat restatement firms and the market consequences of repeat restatements. We find that 38 percent of the restating companies in our sample restate at least twice between 2002 and 2008, and 31 percent of repeat restatement firms restate three or more times during the same period. Our tests identify several auditor and restatement characteristics that distinguish single from repeat restatements at the time of the first restatement. Repeat restatements are more likely among clients of non-Big N auditors and those with lower ex ante accounting quality. However, firms that switch auditors between the end of their misstatement period and the restatement announcement are less likely to experience repeat restatements. Although subsequent restatements tend to be less severe than the first in a series of restatements, firms suffer similar declines in stock prices with up to three restatement announcements. We also find that firms often restate the same fiscal periods multiple times, and these “overlapping” restatements are more frequent when managers are distracted by other corporate events. Our findings should be valuable to investors, regulators, and other parties interested in the characteristics of repeat restatement firms. We provide research design recommendations for future researchers analyzing restatement samples.

Keywords: repeat restatements, accounting restatements, financial misreporting, audit quality

JEL Classification: M41, M42, G34