Restating Under the Radar? Determinants of Restatement Disclosure Choices and the Related Market Reactions

Abstract

This study investigates determinants of restatement disclosure choices and the related stock price reactions in the post-Sarbanes-Oxley era, a period characterized by high restatement volume and mixed signals from regulators about restatement disclosure requirements. Holding the materiality of restatements constant, we show that firms with greater outside monitoring prior to a restatement announcement are more likely to disclose restatements transparently while firms with more aggressive reporting are less likely to disclose restatements transparently. We also provide evidence that firms’ restatement disclosure choices are influenced by the disclosures of their industry peers and that obscure disclosures attenuate the stock price reaction to restatement announcements. Finally, although we find that the transparency and timeliness of restatement disclosures have improved following a Securities and Exchange Commission (SEC) rule designed to improve the quality of restatement disclosures, we also find that some firms continue to disclose severe restatements in the most obscure disclosure venue. This evidence is consistent with SEC concerns about firms “restating under the radar.”