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Coming Forward: The Effects of Social and Regulatory Forces on the Voluntary Restatement of Earnings Subsequent to Wrongdoing

Author

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  • Michael D. Pfarrer

    (Daniels College of Business, University of Denver, Denver, Colorado 80208)

  • Ken G. Smith

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Kathryn M. Bartol

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Dmitry M. Khanin

    (College of Business and Economics, California State University, Fullerton, Fullerton, California 92834)

  • Xiaomeng Zhang

    (Kogod School of Business, American University, Washington, D.C. 20016)

Abstract

We investigate the effects of social and regulatory forces on a firm's decision to disclose past wrongdoing by voluntarily restating its earnings. With an eight-year sample of more than 2,500 public firms, including 170 voluntary restaters, we find that firms are more likely to voluntarily restate their earnings in response to informal social pressures from other firms in their industry and less likely to do so in response to formal regulatory sanctions. We also show that the impact of these forces varies with firm status. We contribute to corporate governance and public policy research that examines the effectiveness of “hard” versus “soft” deterrence measures on firm compliance.

Suggested Citation

  • Michael D. Pfarrer & Ken G. Smith & Kathryn M. Bartol & Dmitry M. Khanin & Xiaomeng Zhang, 2008. "Coming Forward: The Effects of Social and Regulatory Forces on the Voluntary Restatement of Earnings Subsequent to Wrongdoing," Organization Science, INFORMS, vol. 19(3), pages 386-403, June.
    • Handle: RePEc:inm:ororsc:v:19:y:2008:i:3:p:386-403
    DOI: 10.1287/orsc.1070.0323
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