Restatement Disclosures and Management Earnings Forecasts

42 Pages Posted: 20 Feb 2011 Last revised: 3 Dec 2012

See all articles by Michael Ettredge

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Ying (Julie) Huang

University of Louisville

Weining Zhang

Cheung Kong Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 19, 2012

Abstract

We examine the impact of financial restatements on managers’ subsequent earnings forecasts. We argue that restatements create conflicting incentives. One incentive is to repair manager reputations as information providers by providing more and better guidance via earnings forecasts. The opposing incentive is to avoid risk by reducing the information in forecasts. We find that compared to control firms, restatement companies exhibit a decreased propensity to issue quarterly earnings forecasts following restatements. Those that do make forecasts issue fewer forecasts in post-restatement periods. We also find that post-restatement forecasts are less precise, and are less optimistically biased. Overall, our results suggest that, rather than increasing voluntary disclosure in the form of forecasts, managers of restatement companies exhibit risk-averting forecasting behavior following restatements.

Keywords: management forecast, financial restatements, information asymmetry, manager reputation repair, risk aversion, litigation risk

JEL Classification: M41

Suggested Citation

Ettredge, Michael L. and Huang, Ying and Zhang, Weining, Restatement Disclosures and Management Earnings Forecasts (November 19, 2012). Accounting Horizons, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1764524 or http://dx.doi.org/10.2139/ssrn.1764524

Michael L. Ettredge

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Ying Huang (Contact Author)

University of Louisville ( email )

School of Accountancy
College of Business
Louisville, KY KY Kentucky 40292
United States
5028521647 (Phone)
5028521647 (Fax)

HOME PAGE: http://www.linkedin.com/in/ying-julie-huang-02093769

Weining Zhang

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

HOME PAGE: http://english.ckgsb.edu.cn/FacultyResearch/Faculty/Accounting/ZhangWeining.aspx

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