Revealing Corporate Financial Misreporting
61 Pages Posted: 20 Sep 2018
Date Written: September 10, 2018
This study examines how frequently firms restate when they materially misstate their financial statements using stock option backdating as the setting. Stock option backdating provides a unique opportunity to study this issue because it is possible to estimate misstatements with publicly available information to a high level of confidence, and the extensive media coverage of backdating notified boards of directors of the significant risk of misstatement. After identifying firms that materially misstated earnings due to stock option backdating with 95% (99%) probability, we find that only 11.5% (16.1%) of these firms subsequently restated. Restating firms are larger, have greater board independence, higher litigation risk and ROA, a lower market-to-book ratio, less discretionary accruals, and are more likely to have a CFO that was not involved in backdating. Restating firms are also more likely to disclose other adverse news, face securities litigation, and turnover the CFO than firms that appear to materially backdate but do not restate. Since nearly nine of ten firms failed to restate, our results give pause to researchers who use restatements as an indicator of misreporting, and to regulators who levy penalties on those who do self-report.
Keywords: restatements, governance, disclosure, information environment, regulation
JEL Classification: M41, K22, G34
Suggested Citation: Suggested Citation