Abstract
Purpose The purpose of this paper is to discuss the most relevant issues related to the impact of financial restatements in the dynamics of financial markets and identify several research gaps to be investigated in future research. Design/methodology/approach The methodology is based on a systematic review of the literature described by Tranfield et al. (2003). The final sample includes 47 academic papers published from 1996 to 2019. Findings Papers in this domain discuss three main topics: how the market prices the announcement of a financial restatement; how financial restatements affect the announcing firm’s cost of capital and how financial restatements affect firms’ reputation. There are several issues to explore in future research, including whether financial restatements affect the dynamics of financial markets in Europe, whether the market fully and promptly assimilates the information content of a restatement, the role of financial analysts’ information disclosures in this process or how regulators may improve the way they provide investors with timely information about firms’ restating problems. Research limitations/implications There is always some degree of subjectivity in the definition of the keywords, search strings and selection criteria in a systematic review. These are all important aspects, as they delimitate the scope of the study and define the sample of papers to be reviewed. Practical implications The answers to the research questions identified in this paper may provide regulators with information to improve financial accounting and reporting standards and strengthen investors’ confidence in accounting information and the dynamics of financial markets. Originality/value This paper systematically reviews the relevant literature exploring the connection between financial restatements and the dynamics of financial markets. It contributes to the academic community by identifying several research questions that may impact the theory and practice related to accounting quality and capital markets.
Highlights
Accounting quality constitutes a fundamental objective of financial reporting since it facilitates managements’ monitoring and contributes to reducing information asymmetries between firms and their stakeholders
Findings are discussed based on homogeneous topics in the intersection between financial restatements and the functioning of financial markets. 3.1 The papers Table 3 shows the distribution of the final list of papers by journal title and impact factor (SCImago Journal and Country Ranking): Table 3
This suggests that financial restatements constitute a topic of interest in the accounting and finance areas, with many of the papers included in the present review being published in their top journals
Summary
Accounting quality constitutes a fundamental objective of financial reporting since it facilitates managements’ monitoring and contributes to reducing information asymmetries between firms and their stakeholders. Given the importance and relevance of the topic at hand, the present paper develops a systematic literature review (Tranfield et al, 2003; Denyer and Tranfield, 2009) to investigate the impact of financial restatements in the dynamics of financial markets. The second main topic reviewed in the present paper deals with how financial restatements affect the announcing firm’s cost of capital Studies addressing this issue unanimously conclude that such event is costly to the announcing firm as the extant evidence consistently shows an increase in the cost of equity and debt in the post-announcement period. The last topic covered in the present literature review looks into how financial restatements affects firms’ reputation Results suggests that this is a very important aspect that should worry both managers and investors as up to two thirds of the post-event loss in market value seems to be driven by pure reputational effects.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
