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Do firms become more conservative after financial restatements?

Author

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  • Rongbing Huang
  • Zhaoyun Shangguan
  • Gopala Vasudevan

Abstract

We examine whether firms' earnings exhibit higher degrees of conservatism after restating their financial statements. Conservatism is defined as more timely recognition of gains than losses in earnings (Basu, 1997). Using a sample of restatements derived from the Government Accountability Office (GAO) database and four alternative measures of earnings conservatism, we find that overall the restating firms' earnings exhibit greater conservatism during the two years following restatements. This increase is more pronounced for firms that self-prompt their restatements than firms that are prompted to restate by external parties such as auditors or the Securities and Exchange Commission (SEC). We also find weak evidence suggesting that the post-restatement increase in conservatism is more pronounced after the Sarbanes-Oxley Act (SOX) enactment in 2002.

Suggested Citation

  • Rongbing Huang & Zhaoyun Shangguan & Gopala Vasudevan, 2009. "Do firms become more conservative after financial restatements?," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(4), pages 375-394.
  • Handle: RePEc:ids:intjaf:v:1:y:2009:i:4:p:375-394
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    Cited by:

    1. Kose John & Joe Shangguan & Ravi Mateti, 2015. "Financing activities after accounting restatements: an examination of SEOs and PIPEs," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(1), pages 139-160, June.

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