Three Essays on Characteristics and Economic Consequences of Financial Statement Restatements

Restatements are made to correct material errors in companies' financial statements previously filed with SEC. Companies try to avoid restatements because a restatement itself would raise the question of whether the management has been playing the "Numbers Game". My dissertation is motivated by the fact that there was a sharp increase in the frequency of financial restatements over the past decade. Investors, auditors and regulators are seriously concerned about restatements. My dissertation, entitled "Three Essays on Characteristics and Economic Consequences of Financial Statement Restatements", examines restatements from three different perspectives. Study one examines accounting conservatism following restatement disclosures. This paper provides evidence that companies increased earnings conservatism following restatements. In addition, the increased conservatism is more evident among companies that make improvements in their corporate governance. Study two investigates the changes in market reactions to restatement announcements. This study explores why the average market reaction to restatement announcements has decreased by 85 percent since year of 2001. It documents that the dampened market reaction is mainly associated with a change in the characteristics of errors companies correct, and also with who initiated the restatements and how complete the disclosure is. Study three examines restatements from an auditing perspective. This paper examines auditor resignations from restating companies' engagements. It investigates what types of restatements are more likely to trigger resignations and how auditor-client relationship impacts resignation decisions