No description available.

The purpose of this study is to examine financial reporting restatements for the presence of collateral damage in the market’s reaction. Collateral damage is an assessment of investors’ perception of management credibility and a company’s internal controls. Past research indicates the market reaction displays irrational tendencies following a restatement of earnings. In the legal world, the presence of irrational behavior in the capital markets protects corporations from the efficient market hypothesis in damages estimates. I find a high level of market reaction to be unexplained by cash flow disclosures within the restatement. Though my results do not recognize all the sources of collateral damage at a highly significant level, the data does suggest some inefficient market behavior. When the proportion of the total restatement amount/ market capitalization is held constant, small firms are far more negatively impacted than large firms. In addition, companies are punished in the capital markets for providing additional information to the investors regarding disclosure. My conclusion is that the U.S. federal courts should not continue to rely exclusively on the efficient market hypothesis in determining damages amounts because of the prevalence in collateral damage following corrective disclosures.

Mandatory restatements are unique in the nature whereas they are often ignored in restatement literature examining restating firms¡¦ replacement decisions. Furthermore, family studies little examine the role family involvement plays in determining financial reporting quality and firms¡¦ replacement decisions. This paper is motivated to investigate the impact of mandatory restatements and the restatement severity to related parties of financial statements. Particularly, this paper also concerns on the moderating effect of family involvement (family shareholding and family directorships) in the above association. The findings indicate that mandatory restating firms would replace top management, financial executives, firm auditors and supervisors. Firms with higher mandatory restatement severity have more frequent turnover of firm auditors, supervisors and internal auditors. Besides, the findings show that family involvement is an essential moderating factor in the relationship between mandatory restatement and firms¡¦ replacement decisions. The evidence shows that family shareholding has limited motivating effects for family members to be in favor of the replacement of related parties of financial statements involving in material financial reporting failure. However, family directorships enhance family members¡¦ entrenchment in influencing the firms¡¦ replacement decisions so as to strengthen family control. Some evidence indicates that mandatory restating firms would still replace family CEO with family CEO, which further supports the possibility that family members limit managerial positions to capture control of the firms. Overall, the evidence provides a warning sign to Taiwanese security regulators that there¡¦s a necessary to emphasize the punishment mechanisms for those who are responsible for accounting scandals, strengthen managerial turnover disclosure about their family status and educate individual investors the value of turnover disclosure.

Despite countless efforts to elucidate market participants" understanding of the implications of earnings quality, empirical accounting research has rendered two distinct perspectives. The first perspective considers market participants naïve users of accounting information who fail to grasp the implications of earnings quality resulting in temporary security mispricing. The second perspective suggests that market participants scrutinize earnings reports carefully and subsequently discern and price the quality of earnings. The purpose of my research is to help clarify the ambiguity surrounding market participants" pricing of earnings quality using one clearly observable indicator of low-quality earnings, accounting restatements. This study examines the effect pre-restatement earnings quality has on short-window returns and analyst forecast revisions and dispersion following restatement announcements using a cross-section of 719 publicly traded firms that announced restatements between 1997 and 2004. Accrual and book-tax difference metrics are used to proxy for earnings quality. The metrics are examined separately and collectively to ascertain their individual and incremental effects in modeling the market reaction. Further analyses investigate the effects that various levels of investor sophistication have on the market reaction. Results indicate that the market reaction to restatement announcements is significantly influenced by pre-restatement earnings quality. Specifically, both the accrual and book-tax difference measures of earnings quality are significantly and negatively related to the market reaction. Further analysis indicates the predictive power of the model is improved by including both the accrual and book-tax difference proxies. This finding suggests the information in book-tax differences may provide market participants with signals from which to assess earnings quality that are distinct from those contained in accruals. Basic results for analyst forecast dispersion and revisions are not conclusive. Results of the interactions between each earnings quality proxy and level of investor sophistication are significant only for the accrual based measure of earnings quality. This suggests that sophisticated investors are more attuned to the implication of accrual based measures of earnings quality than book-tax difference measures. / Ph. D.

This paper examines the determinants of firms’ non-reliance judgment and the effect of restatements disclosure venue choice on future litigation risk. The Securities and Exchange Commission (SEC) requires firms to disclose any error that will undermine investors’ reliance on previously issued financial statements in Item 4.02 of Form 8-K starting on August 23, 2004. The requirements for non-reliance judgments lack clear guidelines; raising concerns that firms are cloaking errors and mistakes through opaque disclosure venues instead of the more prominent Form 8-K. This paper is the first to investigate the quantitative and qualitative criteria that firms use for non-reliance judgments and estimate the likelihood of specific disclosure venue choice. Applying this estimation into securities class-action litigation setting with controls for restatement characteristics and potential self-selection biases, I find that a more prominent restatement disclosure venue is associated with higher future litigation risk. This finding provides a plausible explanation for the current popularity of so-called ‘stealth restatements.’ These findings are robust to the exclusion of a transition period of the new regulation, firms with multiple restatements, and dismissed lawsuits.

This study investigates whether auditors respond to earnings management pressure created by analyst forecasts. Analyst forecasts create an important earnings target for management, and professional standards direct auditors to consider how this pressure could affect their clients. Using annual analyst forecasts available during the planning phase of the audit, I examine whether this form of earnings management pressure affects clients’ financial statement misstatements. Next, I investigate whether auditors respond to earnings forecast pressure through audit fees and reporting delay. I find that higher levels of analyst forecast pressure increase the likelihood of client restatement. I also find that auditors charge higher audit fees and delay the issuance of the audit report in response to pressure from analyst expectations. Finally, I find that when audit clients are subject to high analyst forecast pressure, a high audit fee response by auditors mitigates the likelihood of client misstatements.

This paper seeks to investigate the reaction of credit ratings and credit markets in response to accounting restatements. Accounting restatements can often be perceived as a precursor to fraudulent activity, which could lead to a more negative credit rating, or a heightened credit default swap (CDS) price. CDS prove to be a useful measuring tool as they adjust to changes relatively quickly; much more quickly than the assessment of a credit rating agency. My results suggest that restatements do indeed have an effect on credit rating. It does, however take longer for credit ratings to be updated after the restatement, but CDS quotes move faster and are just as, if not more accurate. I also find that credit default swaps do not anticipate restatements, showing that while the credit markets are beating the rating agencies, they do not appear to be beating the accountants.

This study provides a test of the market valuation impact of Securities and Exchange Commission (SEC) enforcement actions for foreign firms. I examine the SEC enforcement policy towards foreign firms under its jurisdiction. In contrast to Siegel (2005) who examines earlier years, I find that the SEC's current (post-2002) enforcement intensity is considerable and has increased dramatically by comparison. I construct a novel test using the burgeoning series SEC enforcement events as changes to the legal environment that circumvents the issues associated with firm-level exchange-listing events (e.g. self-selection and simultaneous changes to firm traits). The tests focus on stock returns of foreign firms not targeted by the SEC during event windows surrounding SEC announcements of enforcements against foreign firms. This isolates the effect of a changing enforcement environment. I find that when the SEC takes action against a foreign firm, non-target foreign firms experience positive stock returns. Returns are amplified for firms from weaker home legal environments, suggesting that the returns are due to a perceived increase in SEC scrutiny. Finally, consistent with the market adjusting to the new enforcement regime, the magnitude of non-target firm returns declines with each sequential SEC enforcement action. The overall results provide evidence that SEC oversight plays a significant role in increasing the value of foreign firms, which supports the legal bonding hypothesis discussed in prior literature.

No description available.

No description available.