Accounting Restatements and Corporate Cash Policy
Posted: 18 Apr 2015 Last revised: 1 May 2015
Date Written: April 17, 2015
Using a difference-in-differences approach, we find that firms’ cash holdings significantly increase after announcements of irregularity-related restatements. The increase is more pronounced for firms with a higher precautionary saving demand. The irregularity firms significantly reduce investment and external financing after the restatements. When they fall short of cash reserves, they significantly increase cash savings after the restatements but do not change payout. In contrast, when they have excessive cash, there is weak evidence that they appear to reduce cash savings and increase payout after the restatements. Finally, we find that the market value of cash holdings increases after the restatements. Overall, our results suggest that the firms increase cash holdings after the restatements because cash reserves become more valuable in safeguarding against future shortfalls of internal funds. Our study contributes to the literature on the effect of financial reporting credibility on corporate real decisions.
Keywords: cash policy, financial reporting quality, accounting restatement, read decision
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