The Effects of Accounting Restatements on Firm Growth

37 Pages Posted: 18 Sep 2012 Last revised: 28 Sep 2013

See all articles by Susan Albring

Susan Albring

Syracuse University - Joseph I. Lubin School of Accounting

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy

Xiaolu Xu

University of Massachusetts Boston

Date Written: September 14, 2012

Abstract

Do restatements result in lower firm growth? One argument in support of this contention is that accounting restatements hurt contracting relations between the firm and outside parties such as a firm’s customers and suppliers, negatively impacting firm cash flows. The negative impact on cash flow reduces the level of internal cash holdings available for investment. Another argument is that restatements dampen firm growth by increasing the firm’s cost of external financing. We empirically evaluate these arguments by using the standard sales growth based financial planning model. In carrying out our analysis, we distinguish the effects of restatement on overall firm growth as well as its components of internally and externally financed growth. Our findings suggest that overall firm growth rates decline following a restatement. Furthermore, we find that accounting restatements have a greater adverse impact on externally financed growth rates. We also find that not all restatements yield identical effects: the impact of restatements is more pronounced for the subsample of firms identified to have undertaken the more egregious fraudulent reporting than the subsample of firms that reported restatements to correct previous accounting errors. We also find that firms with severe restatements, measured based on announcement period market reactions, have lower externally financed growth. Overall, our evidence highlights the adverse impact of restatement on firm growth, particularly through external financing.

Keywords: Corporate misreporting, Accounting restatement, Firm growth, External financing

JEL Classification: G32, M41

Suggested Citation

Albring, Susan M. and Huang, Shawn X. and Pereira, Raynolde and Xu, Xiaolu, The Effects of Accounting Restatements on Firm Growth (September 14, 2012). Journal of Accounting and Public Policy, Vol. 32, No. 5, pp. 357–376, 2013 . Available at SSRN: https://ssrn.com/abstract=2148059

Susan M. Albring (Contact Author)

Syracuse University - Joseph I. Lubin School of Accounting ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy ( email )

337 Cornell Hall
Columbia, MO 65211
United States
573-882-6253 (Phone)

Xiaolu Xu

University of Massachusetts Boston ( email )

College of Management
100 Morrissey Blvd
Boston, MA 02125
United States

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