Media Coverage and the Incidence of Financial Restatements in Taiwan

Abstract

Abstract This study investigates the impact of media coverage on the incidence of financial restatements by testing two competing hypotheses: the media monitoring hypothesis and the media pressure hypothesis. The media monitoring hypothesis suggests a negative relationship between media coverage and financial restatements, as media acts as an external monitor, improving the quality of financial reporting. The media pressure hypothesis posits a positive relationship, as media coverage can induce short-term performance pressure on managers, leading to opportunistic earnings manipulation and restatements. Analyzing a sample of Taiwan-listed companies from 2000 to 2021, our overall findings support for the media pressure hypothesis, indicating that higher media coverage increases the likelihood of financial restatements. Further results suggest that the positive impact of media coverage on restatements is mitigated by the presence of foreign institutional investors acting as substitution governance monitors. We also show that the positive impact of media coverage on restatements is more evident among firms with high coverage of directors’ and officers’ liability insurance, serving as a complementary mechanism to amplify the media-driven short-term performance pressure on managers. This study expands our knowledge of financial restatements and underscores the significance of acknowledging the role of media in short-term market pressure and the quality of financial reporting. JEL classification numbers: G14, G34, L82, M41. Keywords: Media Coverage, Financial Restatements, Corporate Governance, Short-term Pressure.