A Re-examination of Accruals Quality Following Restatements
54 Pages Posted: 23 Nov 2016 Last revised: 31 Oct 2019
Date Written: July 2019
Empirical research from the first years following SOX suggests that firms improve accruals quality following restatements, but both the number and materiality of restatements have declined since then. This decline may affect firms’ responses to restatements and hence we re-examine whether restatements are associated with subsequent improvements in accruals quality in a more recent sample. This paper uses a robust multivariate difference in- difference research design to compare the changes in accruals quality of firms restating between 2000 and 2014 with that of a control group matched with propensity score matching. We do not find that firms improve accruals quality more than the control group following a restatement, even when we isolate the types of restatements considered most material. However, we do find that restatements followed by the most negative stock market reactions are associated with a relative increase in accruals quality, indicating that only restatements deemed very severe by investors lead to subsequent improvements in accruals quality. This paper hence suggests that firms’ responses to restatements have changed concurrently with the trend of fewer and less material restatements in recent years.
Keywords: Restatement of corporate earnings; earnings quality; capital markets; materiality; Sarbanes-Oxley Act; enforcement; consequences of earnings misstatements; accrual accounting; difference-in-difference; propensity score matching
JEL Classification: M41, G14, M48
Suggested Citation: Suggested Citation