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Earnings Restatements, the Sarbanes-Oxley Act and the Disciplining of Chief Financial Officers

44 Pages Posted: 21 Dec 2007 Last revised: 2 Mar 2010

Denton Collins

Texas Tech University - School of Accounting

Adi Masli

University of Arkansas - Sam M. Walton College of Business

Austin L. Reitenga

University of Alabama

Juan Manuel Sanchez

University of Texas at San Antonio

Date Written: March 1, 2010

Abstract

We investigate involuntary chief financial officer (CFO) turnover following earnings restatements, the labor market penalties imposed on former restatement-firm CFOs, and whether these disciplinary consequences have increased following the passage of the Sarbanes-Oxley Act of 2002 (SOX). Our results suggest that, relative to a control group of non-restating firms, firms restating earnings have higher rates of involuntary CFO turnover, and that former restatement-firm CFOs face stiff labor market penalties. We generally find that the passage of SOX has not increased involuntary CFO turnover rates following restatements. However, we find that labor market penalties for former CFOs of restatement firms are more severe in the post-SOX period, suggesting that SOX has increased ex post settling up costs. Our results suggest that the influence of SOX on the labor market has resulted in CFOs being held more accountable for their actions.

Keywords: Earnings restatements, chief financial officers, executive compensation, executive turnover, labor market penalties, disciplinary actions

JEL Classification: M51, M52

Suggested Citation

Collins, Denton and Masli, Adi and Reitenga, Austin L. and Sanchez, Juan Manuel, Earnings Restatements, the Sarbanes-Oxley Act and the Disciplining of Chief Financial Officers (March 1, 2010). Journal of Accounting, Auditing and Finance, Vol. 24, No. 1, pp. 1-34, 2009. Available at SSRN: https://ssrn.com/abstract=1076800 or http://dx.doi.org/10.2139/ssrn.1076800

Denton Collins

Texas Tech University - School of Accounting ( email )

Lubbock, TX 79409
United States

Adi Masli

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

Austin L. Reitenga (Contact Author)

University of Alabama ( email )

Culverhouse College of Commerce
Box 870223
Tuscaloosa, AL 78249
United States
205-348-5780 (Phone)

Juan Manuel Sanchez

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

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