Beyond the Restatement Decision: The Persistence of Executive Compensation in Explaining Disclosure Transparency Choice
41 Pages Posted: 19 Aug 2011
Date Written: August 15, 2011
In the post-Enron era the number of “restatements” of annual financial results increased from less than 300 per year prior to 2001 to more than 1000 per year in 2005 and 2006. Prior research has demonstrated that CEO compensation is positively associated with companies that issue restatements. Notwithstanding associated risk of job loss and compensation reduction, these managers sometimes reap pecuniary benefits from restatements. SEC regulations require companies to file an 8K to report the need to restate prior results. However, on average over 40% of restatements are “stealthy” in that they do not file an 8K. For companies that issue a restatement we examine the association between executive pay how the restatement was disclosed (whether an 8K was filed). We find that equity pay for executives is negatively associated with filing an 8K. Our results suggest that higher equity pay motivates managers to minimize the transparency of restatements.
Keywords: Compensation, Restatement, Transparency
JEL Classification: M41, M52
Suggested Citation: Suggested Citation