Is the Decline in the Information Content of Earnings Following Restatements Short-Lived?

52 Pages Posted: 21 Aug 2013 Last revised: 5 Mar 2014

See all articles by Xia Chen

Xia Chen

Singapore Management University - School of Accountancy

Qiang Cheng

Singapore Management University - School of Accountancy

Alvis K. Lo

Boston College

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Date Written: June 3, 2013

Abstract

Prior research finds that the decline in the information content of earnings after restatement announcements is short-lived and the earnings response coefficient (ERC) bounces back after three quarters. We re-examine this issue using a more recent and comprehensive sample of restatements. We find that material restatement firms experience a significant decrease in the ERC over a prolonged period – close to three years after restatement announcements. In contrast, other restatement firms experience a decline in the ERC for only one quarter. We further find that among material restatement firms, those that are subject to more credibility concerns and those that do not take prompt actions to improve reporting credibility experience a longer drop in the ERC. Lastly, reconciling with prior research, we find that using a more powerful proxy for material restatements and imposing less restrictive sampling requirements help increase the power of the tests to detect the long-run drop in the ERC.

Keywords: accounting restatements, information content of earnings, accounting irregularities

JEL Classification: G32, M40

Suggested Citation

Chen, Xia and Cheng, Qiang and Lo, Alvis K., Is the Decline in the Information Content of Earnings Following Restatements Short-Lived? (June 3, 2013). The Accounting Review 89 (1): 177-207, January 2014, Available at SSRN: https://ssrn.com/abstract=2312842

Xia Chen

Singapore Management University - School of Accountancy ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore

Alvis K. Lo

Boston College ( email )

Carroll School of Management, Fulton 542
140 Commonwealth Ave.
Chestnut Hill, MA 02467
United States
617-552-8674 (Phone)

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