Impact of post-restatement actions taken by a firm on non-professional investors' Credibility perceptions

Elizabeth Dreike Almer, Audrey A. Gramling, Steven Kaplan

Research output: Contribution to journalArticle

17 Citations (Scopus)

Abstract

The frequency of earnings restatements has been increasing over the last decade. Restating previous earnings erodes perceived trustworthiness and competence of management, giving firms strong incentives to take actions to enhance perceived credibility of future financial reports [Farber, D. B.: 2005, The Accounting Review 80(2), 539-561.]. Using an experimental case, we examine the ability of post-restatement actions taken by a firm to positively influence non-professional investors' perceptions of management's financial reporting credibility. Our examination considers credibility judgments following two types of restatements - those resulting from fraud in which the character, ethics, and values of an organization may be called into question [cf. Copeland, Jr., J. E.: 2005, Accounting Horizons 19(1), 35-43.], and those resulting from non-fraud (i.e., aggressive accounting). Based on the information in the experimental case, non-professional investors take the role of potential equity investors and make a judgment about management's financial reporting credibility after reviewing a set of post-restatement actions taken by a firm. The possible actions include changes in four corporate governance mechanisms (i.e., internal audit function, external audit firm, board of directors, CFO) and a buyback of company stock. Our results provide an important contribution to the literature by demonstrating that among non-professional investors, perceptions of management's financial reporting credibility are affected both by the post-restatement action taken and the nature of the restatement. These results offer insight into the formation of a key credibility judgment made by non-professional investors following a trust-destroying event, an earnings restatement.

Original languageEnglish (US)
Pages (from-to)61-76
Number of pages16
JournalJournal of Business Ethics
Volume80
Issue number1
DOIs
StatePublished - Jun 2008

Fingerprint

credibility
investor
firm
financial management
audit
board of directors
trustworthiness
corporate governance
fraud
Nonprofessional investors
Restatements
Credibility
Investors
equity
moral philosophy
incentive
organization
examination
event
ability

Keywords

  • Corporate governance
  • Credibility
  • Restatements
  • Trust

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics
  • Business, Management and Accounting(all)

Cite this

Impact of post-restatement actions taken by a firm on non-professional investors' Credibility perceptions. / Almer, Elizabeth Dreike; Gramling, Audrey A.; Kaplan, Steven.

In: Journal of Business Ethics, Vol. 80, No. 1, 06.2008, p. 61-76.

Research output: Contribution to journalArticle

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