How Do Nonprofessional Investors Interpret Restatements? The Joint Effects of Management Reputation and Managerial Actions

• In Event: Investor Judgment

Abstract

Companies issuing restatements are publicly announcing that previous earnings reports, thought to be reliable, were, in fact, unreliable. Such an admission has the potential to damage the company and its managers. Because restatements are occurring with greater frequency and some firms suffer greater damage than others, researchers have been keenly interested in gaining a better understanding of how investors interpret and respond to restatements. We extend research by examining the joint effects of management reputation and managerial actions on nonprofessional investors’ investment and managerial judgments. We find that the negative consequences from a restatement are lessened when the CEO has a favorable reputation for financial reporting. More importantly, we find that the managerial actions have no incremental effects on nonprofessional investors’ judgments when the CEO has a favorable reputation for financial reporting. Our results suggest that managerial reputation and managerial actions serve as substitutes to lessen the negative consequences from issuing a restatement.

Authors

• Shana Clor-Proell, Texas Christian University

• Steve Kaplan, Arizona State University