Earnings informativeness after financial statement restatements

Abstract

Financial restatements may affect core earnings if the restatements involve revenue, cost of sales or ongoing expenses. Hence, restatements may impact information content of earnings. Using the earnings response coefficient (ERC) as a measure of the information content of earnings, we document a decline in ERCs in several quarters following the announcement of restatements. The decline in ERCs is especially evident in restatements that are unattributed to any source or attributed to the company, classified as fraud or no fraud, affect multiple accounts (pervasive) and more than one year. Overall, our results suggest that restatements that are especially severe cause investors to lose confidence in reported earnings and that these effects may persist for several quarters beyond the restatement.