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Changes in the predictive ability of earnings around earnings restatements

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  • Kevin W. Hee
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    Abstract

    Purpose – The purpose of this paper is to investigate whether earnings restatements have a larger effect on the earnings quality (proxied by persistence) of restating firms relative to similar non-restating firms and if restated earnings are more persistent than the originally reported earnings. Design/methodology/approach – Cross-sectional earnings persistence models are used to analyze how earnings persistence changes around restatements for both the originally reported earnings and the new restated earnings numbers. The study looks at restatements from 1997 through 2006. Findings – The findings show that restating firms exhibit a larger increase in earnings persistence from the two-year period before to the two-year period after the restatements. Results also show that the restated portion of earnings is incrementally persistent relative to the originally reported earnings and the incremental persistence, although mitigated, is still significant after the passage of the Sarbanes-Oxley Act. In addition, the evidence shows that core account restatements are associated with more persistent earnings relative to non-core restatements in the two-year period after the most recent restatement year. Originality/value – The paper presents the first study to examine earnings restatements' impact on the future earnings persistence of restating firms in the context of the restated financial period as opposed to the restatement announcement period.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Review of Accounting and Finance.

    Volume (Year): 10 (2011)
    Issue (Month): 2 (June)
    Pages: 155-175

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    Handle: RePEc:eme:rafpps:v:10:y:2011:i:2:p:155-175

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    Related research

    Keywords: Accounting procedures; Earnings; Financial reporting; United States of America;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Richardson, Scott A. & Sloan, Richard G. & Soliman, Mark T. & Tuna, Irem, 2005. "Accrual reliability, earnings persistence and stock prices," Journal of Accounting and Economics, Elsevier, vol. 39(3), pages 437-485, September.
    2. Lev, Baruch, 1983. "Some economic determinants of time-series properties of earnings," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 31-48, April.
    3. Suraj Srinivasan, 2005. "Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members," Journal of Accounting Research, Wiley Blackwell, vol. 43(2), pages 291-334, 05.
    4. Degeorge, François & Patel, U & Zeckhauser, Richard, 1998. "Earnings Management to Exceed Thresholds," CEPR Discussion Papers 1790, C.E.P.R. Discussion Papers.
    5. Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
    6. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
    7. Palmrose, Zoe-Vonna & Richardson, Vernon J. & Scholz, Susan, 2004. "Determinants of market reactions to restatement announcements," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 59-89, February.
    8. Core, John E. & Guay, Wayne R. & Verdi, Rodrigo, 2008. "Is accruals quality a priced risk factor?," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 2-22, September.
    9. Dichev, Ilia D. & Tang, Vicki Wei, 2009. "Earnings volatility and earnings predictability," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 160-181, March.
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