Do Immaterial Error Corrections Matter?

Abstract

We provide large-sample archival evidence on whether, despite their designation, immaterial error corrections matter, first by being consequential for share values and second by being diagnostic with respect to more pervasive and/or more severe financial reporting problems that indicate poor reporting reliability. With regard to valuation consequences, we show that the disclosure of immaterial error corrections is associated with negative share returns, consistent with investors perceiving this information to be pertinent to assessments of intrinsic value. These effects are more negative for corrections that result in larger decreases in net income and that involve multiple reporting issues. Our findings suggest that, despite their reduced transparency relative to disclosures of material error corrections (restatements), immaterial error correction disclosures matter to equity investors. With regard to reporting reliability, we show that immaterial error corrections predict future financial reporting problems including immaterial error corrections, restatements and material weaknesses in internal controls. We believe our findings make two contributions. First, future research on audit quality and reporting quality might incorporate immaterial error corrections as quality-indicators. Second, our analyses inform debates about managers’ materiality assessments by providing evidence on consequences of immaterial error corrections.

Keywords: materiality, material error, immaterial error, error correction, revision, out-of-period adjustment

JEL Classification: M41, M42