Companies lose credibility for 3 years after material earnings restatements
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SMU Associate Professor of Accounting Chen Xia and SMU Professor of Accounting Cheng Qiang co-wrote a paper, with Alvis K. Lo of Boston College, which found that material restatements of earnings that involve correcting accounting irregularities, and not just honest errors, lead to a loss in company credibility with investors lasting substantially longer than previously documented. The study, which appears in the current issue of The Accounting Review, a journal of the American Accounting Association, found that companies issuing a material restatement experience a significant decline in the “earnings response coefficient”, a measure of investors’ response to earnings reports, for 11 quarters after the restatement is announced.
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Accounting Today
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