Reporting Misstatements as Revisions: An Evaluation of Managers’ Use of Materiality Discretion
52 Pages Posted: 18 Sep 2019 Last revised: 2 Dec 2020
Date Written: November 19, 2020
In recent years, firms reporting revisions of prior financial statements outnumber firms reporting restatements. Material misstatements are required to be transparently disclosed as restatements, whereas immaterial errors/irregularities can be reported as revisions. Based on SEC guidance and widely used materiality benchmarks, I find that 36 percent of revisions meet at least one materiality criterion. These “material” revisions elicit a significant negative market response, suggesting that the market perceives these misstatements as consequential. I further find that managers are more likely to revise rather than restate these material misstatements when they have a strong incentive to avoid restatements, namely compensation clawback provisions. Overall, my results suggest that materiality discretion is being used opportunistically to conceal material misstatements as revisions.
Keywords: materiality, restatements, revisions, materiality judgment, clawback provisions
JEL Classification: M41, M42
Suggested Citation: Suggested Citation