Essays on accounting restatements

Menghistu Mulugeta Sallehu

doi:10.17918/etd-3535

The two essays in this dissertation address whether restatements provide benefits by improving earnings persistence, pricing, and comparability of accounting amounts. The first essay investigates whether accounting restatements improve the persistence and pricing of earnings and their subcomponents of accruals, cash balance changes, cash to debt holders, and cash to equity holders. I find that the persistence of accruals and of the cash subcomponents of retained cash, distributions to debt and equity holders improves after restatement. This finding suggests that restatements improve the quality of financial reporting by forcing firms to comply with the generally accepted accounting principles. In a more detailed test, I find that non-auditor-mandated and error-related restatements lead to more-persistent accrual and cash components of earnings. Further, I find that the mispricing of accruals and of the retained-cash subcomponents of earnings appears to cease after restatement. This finding is robust whether restatements are disclosed in headlines in the financial press (high prominence), in the body of press releases (medium prominence), or in footnotes (low prominence). The evidence suggests that earnings persistence improves after accounting restatements, and that earnings components are priced more efficiently irrespective of the venue of the restatement announcement. The second essay investigates whether misstatements limit the comparability of restating firms' financial statements to those of their peers'. The FASB asserts that financial restatements enhance the within-firm inter-period and within-period inter-firm comparability of accounting amounts. However, recent reports have expressed concern over the costs associated with accounting restatement, and have questioned the benefits of restatement. This study tests these assertions by examining whether accounting amounts become more comparable after restatement. I hypothesize that restatements re-endow accounting amounts with the fundamental qualitative characteristics, and that they enhance the comparability of accounting amounts. Further, I predict that comparability improves for restatements that enhance consistency, understandability, accounting quality, and investor confidence. Using accounting-system and value-relevance comparability metrics, I find that eliminating inconsistencies and re-endowing accounting amounts with the fundamental qualitative characteristics through restatement leads to greater comparability. In further tests, I find that comparability of accounting amounts improves for restatements associated with errors and for non-auditor-mandated restatements.

Essays on accounting restatements

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Essays on accounting restatements

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