Revealing Corporate Financial Misreporting

Posted: 3 Jan 2019

See all articles by Quinn Curtis

Quinn Curtis

University of Virginia School of Law

Dain C. Donelson

University of Iowa

Justin Hopkins

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2018

Abstract

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

Curtis, Quinn and Donelson, Dain C. and Hopkins, Justin, Revealing Corporate Financial Misreporting (August 24, 2018). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3304124

Quinn Curtis

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

HOME PAGE: http://https://www.law.virginia.edu/faculty/profile/qc3q/2298852

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Justin Hopkins (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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