Reporting Misstatements as Revisions: An Evaluation of Managers’ Use of Materiality Discretion

54 Pages Posted: 18 Sep 2019

Date Written: August 29, 2019

Abstract

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 45 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. Moreover, the impact of clawback provisions is even stronger when the misstatement allows for more materiality discretion. 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

Thompson, Rachel, Reporting Misstatements as Revisions: An Evaluation of Managers’ Use of Materiality Discretion (August 29, 2019). Available at SSRN: https://ssrn.com/abstract=3450828 or http://dx.doi.org/10.2139/ssrn.3450828

Rachel Thompson (Contact Author)

University of Texas at El Paso ( email )

500 W University Ave
El Paso, TX 79902
United States

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