How Do Restatements Affect Outside Directors and Boards? A Review of the Literature

Journal of Accounting Literature, Forthcoming

61 Pages Posted: 13 Jun 2018 Last revised: 11 Jul 2019

See all articles by Daniel Street

Daniel Street

University of Alabama

Dana R. Hermanson

Kennesaw State University - Department of Accounting

Date Written: May 29, 2019

Abstract

This paper reviews academic literature related to the consequences that outside directors and boards may face in the wake of earnings restatements and suggests directions for future research. We examine loss of board seats; recruitment of new directors; proxy recommendations and shareholder support; pre-emptive director departures; director wealth effects; director reputation, litigation, and sanction risks; international evidence; and legal proposals for reform. The overall picture that emerges from the literature is that directors’ primary risk in the wake of earnings restatements is loss of board seats, in part through adverse proxy advisor recommendations and reduced shareholder support. Directors typically face little risk of legal liability or SEC sanctions, and some directors pre-emptively leave a problem company’s board and reduce their loss of interlocked board seats. Some legal scholars have called for director liability to be increased so as to promote more vigilant board oversight. Companies often focus on increasing the independence of the board in the wake of a restatement in an effort to repair organizational reputation. While researchers have revealed a host of important findings to date, much more can be learned about the effects of restatements on outside directors and boards.

Keywords: Restatement, board of directors, independent director, outside director, proxy advisor, shareholders

JEL Classification: M41

Suggested Citation

Street, Daniel and Hermanson, Dana R., How Do Restatements Affect Outside Directors and Boards? A Review of the Literature (May 29, 2019). Journal of Accounting Literature, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3186666 or http://dx.doi.org/10.2139/ssrn.3186666

Daniel Street (Contact Author)

University of Alabama ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Dana R. Hermanson

Kennesaw State University - Department of Accounting ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6077 (Phone)
770-499-3420 (Fax)

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