Voluntary vs. Forced Financial Restatements: The Role of Board Independence

Abstract

Using a sample of companies that restated their earnings over the period 1997–2002, this study finds that the probability of voluntary as opposed to forced restatements is positively related to the independence of both the board of directors and the audit committee. Following both voluntary and forced earnings restatements, companies increase the proportion of independent directors on both the board and the audit committee; three years after restatements, both types of restating companies attain similar levels of director independence. Moreover, the study finds comparable postrestatement long-run stock performance for all restating and matched companies, which suggests that postrestatement enhancements to internal control systems help restore companies’ blemished reputations.