Spillover effects of restatements on the financial reporting behavior of board-interlocked firms

Publication Type

Conference Paper

Publication Date

8-2012

Abstract

This study examines the spillover effects of restatements on the financial reporting behavior of firms that share common directors with the restating firms (“interlocked firms”). Using a sample of restating firms, we find that restatements trigger investors’ concerns over the financial reporting among interlocked firms and these reporting concerns induce the directors associated with the restatement (“tainted directors”) to improve the financial reporting quality at the interlocked firms. Specifically, interlocked firms exhibit lower discretionary accruals in the year after the restatement events than do control firms, and this effect is more pronounced when the tainted directors also sit on the audit committees of the interlocked firms or when the tainted directors continue to serve in the interlocked firms in the year following the restatement. Our study extends the literature on the consequences of restatement and the governance implications of board interlocks.

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

Publication

American Accounting Association Annual Meeting

City or Country

Washington DC, USA

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