A re‐examination of accruals quality following restatements

Herly, Marie; Bartholdy, Jan; Thinggaard, Frank

doi:10.1111/jbfa.12445

Cited by 5 publications

(6 citation statements)

References 80 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…This relation contrasts Wiedman and Hendricks (2013), who find that all firms decrease bias after a restatement but mirrors the results found by Herly et al. (2020).…”

Section: A Model Of Restatement Costs and Reporting Biascontrasting

confidence: 92%

“…A consequence of this is that low restatement costs may not motivate firms to change their behavior, in line with recent evidence by Herly et al. (2020).…”

Section: A Model Of Restatement Costs and Reporting Biassupporting

confidence: 85%

“…Hypothesis H2b introduces the possibility that firms increase their equilibrium reporting bias after a restatement if the cost observed at the initial restatement was sufficiently low. This relation contrasts Wiedman and Hendricks (2013), who find that all firms decrease bias after a restatement but mirrors the results found by Herly et al (2020).…”

Section: Hypothesis H2bcontrasting

confidence: 83%

“…Wiedman and Hendricks (2013) find evidence suggesting that firms bias less after restating to signal higher reporting quality, but recent evidence by Herly et al. (2020) indicates that accruals quality is not increasing after restatements, though, only after the restatements deemed mostly severe by investors. We complement these results because we find that restatement costs affect firms' reporting bias strategies if the observed costs differed from the expected, which may explain the conflicting evidence on accruals quality following restatements.…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Restatement costs and reporting bias

Herly

Lambertsen

2022

Business Fin & Account

Self Cite

View full text Add to dashboard Cite

Financial restatements are costly, but frequent, events and many firms restate several times. We explore why rational managers engage in misreporting despite the costly consequences. To guide our analysis, we build a parsimonious model of reporting bias and the cost of restating. In our model, the observed cost of a restatement conveys information about the true cost of biasing financial statements, which the manager incorporates into the optimal choice of bias. A restatement hence offers managers an opportunity to learn about the true cost of reporting bias, which allows them to update their biasing strategy if the observed cost differs from the expected. We test the model's predictions by analyzing how firms' accruals quality changes after observing the costs attached to restating, which we measure as the market loss following a restatement scaled by the restatement's net income effect. We find that future accruals quality is increasing in the cost of restating and the change in the cost of restating. Consistent with our stylized model, our results indicate that rational managers use the insights from prior restatements to improve their future bias strategy.

show abstract

“…This relation contrasts Wiedman and Hendricks (2013), who find that all firms decrease bias after a restatement but mirrors the results found by Herly et al. (2020).…”

Section: A Model Of Restatement Costs and Reporting Biascontrasting

confidence: 92%

“…A consequence of this is that low restatement costs may not motivate firms to change their behavior, in line with recent evidence by Herly et al. (2020).…”

Section: A Model Of Restatement Costs and Reporting Biassupporting

confidence: 85%

Section: Hypothesis H2bcontrasting

confidence: 83%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Restatement costs and reporting bias

Herly

Lambertsen

2022

Business Fin & Account

Self Cite

View full text Add to dashboard Cite

show abstract

“…For example,Herly et al (2020) find that accruals quality does not improve for firms restating financial statements between 2000 and 2014. It will be interesting to examine whether accruals quality improves for firms in certain life-cycle stages.…”

mentioning

confidence: 99%

Does financial reporting quality vary across firm life cycle?

Krishnan

Myllymäki

Nagar

2020

Business Fin & Account

View full text Add to dashboard Cite

This study provides empirical evidence that across firm life cycle there is considerable variation in financial reporting quality. Specifically, the focus is on matching quality captured by the contemporaneous correlation between revenues and expenses and on the likelihood of material misstatements in financial statements. On balance, we observe an inverted U-shaped pattern of financial reporting quality, that is, lower quality during the introduction, growth, and decline stages, compared to the mature stage of firm life cycle. First, we find poor matching of expenses with revenues in the introduction, growth, and decline stages. This implies conservative or aggressive recognition of expenses, leading to less informative earnings, and hence lower financial reporting quality. Then, we examine the likelihood of material misstatements, measured by weaknesses in internal control over financial reporting, financial statement restatements, Securities and Exchange Commission's (SEC) accounting and auditing enforcement releases (AAER), and financial statement divergence (FSD) scores. We find clear indications that firms in the introduction, growth, and decline stages are significantly more likely to have misstatements in their financial statements compared to firms in the mature stage. Overall, the findings of this study enhance our understanding of the role of life-cycle stages in causing variation in financial reporting quality.

show abstract

Does the Disclosure of Proprietary Information About Loan Losses Pose a Threat to Financial Stability?

Thinggaard,

Bartholdy

2024

J Financ Serv Res

View full text Add to dashboard Cite

Concerns have been expressed that public disclosure of outcomes from regulatory inspections of banks could lead to contagion and instability in the financial systems. This paper exploits Denmark's system of open inspection reports to analyze whether announcements of required increases in loan loss reserves by the Danish supervisory authorities, following an ordinary bank inspection, lead to contagion in financial markets. We find strong evidence of negative returns for the announcing banks over the period 2009–2020, suggesting that inspection reports containing proprietary information about loan losses provide value-relevant news to investors. We also find statistically significant contagion effects in the share price reactions among non-announcing peer banks. However, the reactions of other, non-affected banks are mild and confined to smaller banks, which is reassuring from a systemic risk perspective. Overall, our findings support the use of accounting disclosures as a policy tool for bank supervisors.

show abstract

A re‐examination of accruals quality following restatements

Abstract: and seminar participants at the 2015 CBS research seminar for helpful comments. Marie Herly gratefully acknowledges the financial support of FSR Danish Auditors. The data that support the findings of this study are available through public sources listed in the paper.

Cited by 5 publications

References 80 publications

Restatement costs and reporting bias

Restatement costs and reporting bias

Does financial reporting quality vary across firm life cycle?

Does the Disclosure of Proprietary Information About Loan Losses Pose a Threat to Financial Stability?

Contact Info

Product

Resources

About