Management Guidance Pre‐ and Post‐Restatement

26 Pages Posted: 20 Oct 2014

See all articles by Elizabeth A. Gordon

Elizabeth A. Gordon

Temple University - Department of Accounting

Elaine Henry

Stevens Institute of Technology - School of Business

Xudong Li

Monmouth University

Lili Sun

University of North Texas - Department of Accounting

Date Written: September/October 2014

Abstract

We examine whether the quality of restating firms’ management guidance differs in periods before and after restatement announcements. While characteristics of restating firms and the consequences of restatement have been a central topic in accounting and auditing research, the quality of management guidance around restatements is less well understood. We consider two competing characterizations of the link between management forecast accuracy and bias and restatement (an event that tends to signal poor financial controls): “Forecast–Opportunism Explanation” and “Forecast–Ability Explanation”. Under the Forecast–Opportunism Explanation, pre‐restatement weaknesses in financial controls enable managers to manipulate earnings toward forecasts and to meet or exceed opportunistically biased forecasts, and the post‐restatement strengthening of financial controls constrains opportunistic behavior. Under the Forecast–Ability Explanation, pre‐restatement weaknesses in financial controls impede managers’ ability to issue accurate forecasts, and post‐restatement improvements remove impediments so that the accuracy of forecasts improves; forecast bias remains unaffected. Evidence indicates that before a restatement, restating firms’ forecasts are more accurate and relatively more downwardly biased than control firms’ forecasts. Post‐restatement, restating firms have less accurate and less downwardly biased management guidance. Our overall results are consistent with the Forecast–Opportunism Explanation.

Keywords: restatement, management guidance, financial controls

Suggested Citation

Gordon, Elizabeth A. and Henry, Elaine and Li, Xudong and Sun, Lili, Management Guidance Pre‐ and Post‐Restatement (September/October 2014). Journal of Business Finance & Accounting, Vol. 41, Issue 7-8, pp. 867-892, 2014. Available at SSRN: https://ssrn.com/abstract=2511994 or http://dx.doi.org/10.1111/jbfa.12080

Elizabeth A. Gordon (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
2152046422 (Phone)

Elaine Henry

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Xudong Li

Monmouth University

400 Cedar Ave
West Long Branch, NJ 07764
United States

Lili Sun

University of North Texas - Department of Accounting ( email )

1155 Union Circle #305219
Denton, TX 76203-5017
United States
940-565-3077 (Phone)

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