Piercing the Veil of Executive Turnover: Evidence from Downward Restatement Firms

Abstract

Understanding the factors affecting executive turnover is particularly important, because it sheds light on to what extent such turnovers serves as an effective corporate monitoring and governance tool. Using hand-collected data to control firm-specific restatement characteristics, we examine how the likelihood of executive turnover is associated with other corporate governance variables for restatement firms. We find the likelihood of executive turnover increases with restatement severity, downward credit rating, large board size, and independent board members, but decreases with the dismissal of external auditors. Our results hold regardless whether the restatement is prompted by the company itself or other parties (e.g. auditors, regulators). In addition, our main evidence is more pronounced post – Sarbanes Oxley Act (SOX), consistent with the argument that board of directors use job termination more frequently to deal with management dereliction and to signal their commitment in enhancing corporate governance post-SOX. Our paper provides insights on intricacy among corporate governance schemes, and contributes to reconcile inconsistent conclusions in prior studies regarding the effect of restatement on executive turnovers.