Department of Economics and Business Economics

A Re-examination of Accruals Quality Following Restatements

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Empirical research from the first years following the Sarbanes‐Oxley Act (SOX) in the U.S. suggests that firms improve accruals quality following restatements, but the materiality of restatements has declined since then. This decline may affect firms' responses to restatements, and hence we paper re‐examine whether restatements are associated with subsequent improvements in accruals quality in a more recent sample. We compare the changes in accruals quality of firms restating between 2000 and 2014 with that of a control group. We do not find that firms improve accruals quality more than the control group following a restatement, even when we isolate the types of restatements considered to be most material. However, we do find that restatements followed by the most negative stock market reactions are associated with a relative increase in accruals quality, indicating that only restatements deemed very severe by investors lead to subsequent improvements in accruals quality. Our results suggest that firms' responses to restatements have changed concurrently with the trend of fewer and less material restatements in recent years.
Original languageEnglish
JournalJournal of Business Finance & Accounting
Pages (from-to)882-909
Number of pages28
Publication statusPublished - Jul 2020

    Research areas

  • Sarbanes-Oxley Act, accrual accounting, capital markets, consequences of earnings misstatements, difference-in-differences, earnings quality, enforcement, materiality, propensity score matching, restatement of corporate earnings

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