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Management Guidance Pre- and Post-Restatement

Journal of business finance & accounting, 2014-09, Vol.41 (7-8), p.867-892 [Peer Reviewed Journal]

2014 John Wiley & Sons Ltd ;Copyright Blackwell Publishing Ltd. Sep-Oct 2014 ;ISSN: 0306-686X ;EISSN: 1468-5957 ;DOI: 10.1111/jbfa.12080

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  • Title:
    Management Guidance Pre- and Post-Restatement
  • Author: Gordon, Elizabeth A. ; Henry, Elaine ; Li, Xudong ; Sun, Lili
  • Subjects: Accounting ; Auditing ; Business management ; Earnings forecasting ; Earnings management ; financial controls ; Financial management ; Financial restatements ; Forecasts ; management guidance ; Managers ; Manipulation ; Organizational behavior ; restatement ; Studies
  • Is Part Of: Journal of business finance & accounting, 2014-09, Vol.41 (7-8), p.867-892
  • Description: We examine whether the quality of restating firms’ management guidance differs in periods before and after restatement announcements. While characteristics of restating firms and the consequences of restatement have been a central topic in accounting and auditing research, the quality of management guidance around restatements is less well understood. We consider two competing characterizations of the link between management forecast accuracy and bias and restatement (an event that tends to signal poor financial controls): “Forecast–Opportunism Explanation” and “Forecast–Ability Explanation”. Under the Forecast–Opportunism Explanation, pre‐restatement weaknesses in financial controls enable managers to manipulate earnings toward forecasts and to meet or exceed opportunistically biased forecasts, and the post‐restatement strengthening of financial controls constrains opportunistic behavior. Under the Forecast–Ability Explanation, pre‐restatement weaknesses in financial controls impede managers’ ability to issue accurate forecasts, and post‐restatement improvements remove impediments so that the accuracy of forecasts improves; forecast bias remains unaffected. Evidence indicates that before a restatement, restating firms’ forecasts are more accurate and relatively more downwardly biased than control firms’ forecasts. Post‐restatement, restating firms have less accurate and less downwardly biased management guidance. Our overall results are consistent with the Forecast–Opportunism Explanation.
  • Publisher: Oxford: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0306-686X
    EISSN: 1468-5957
    DOI: 10.1111/jbfa.12080
  • Source: Alma/SFX Local Collection
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