Abstract

Financial restatements can lead to numerous substantive and symbolic actions that help offending firms regain legitimacy. Prior research has generally focused on “changing of the guard” as a response to restatements, where directors exit the board. However, firms are not limited to the binary decision of whether directors should exit or not. Instead, directors might exit the audit committee while still retaining their board seats—a phenomenon we refer to as committee exit. Drawing on symbolic management theory, we argue that firms may engage in a “shuffling of the guard” that allows them to retain key directors with greater human and social capital, structural power, and influence. Using a sample of audit committee members at publicly traded firms who announced a restatement between 2003 and 2018, we explore which of three possible paths audit committee members take following a restatement: staying on the audit committee, exiting the audit committee but remaining on the board, or exiting the board entirely. The results of our analysis provide support to our arguments that committee exit is an important decoupling tactic for firms that signals change while simultaneously allowing for stability on the board.

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