Restatement Disclosures and Management Earnings Forecasts
42 Pages Posted: 20 Feb 2011 Last revised: 3 Dec 2012
Date Written: November 19, 2012
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: Suggested Citation