Can Management Turnover Restore the Financial Statement Credibility of Restating Firms? Further Evidence

Mai Dao, Hua-Wei Huang, Ken Y. Chen and Ting-Chiao Huang

Journal of Business Finance & Accounting, 2014, vol. 41, issue 7-8, 893-925

Abstract: This paper investigates the association between management turnover following financial restatements and the probability of subsequent restatements. We find that restating firms that replace management (CEO and/or CFO) are more likely to restate their financial statements again. We also find that subsequent restatements are mainly attributable to the new management. Overall, our results suggest that management turnover following restatements may not be an effective mechanism to remediate financial restatements, but the change to a new management results in a greater possibility of lower earnings quality (i.e., higher probability of subsequent financial restatements and accruals-based earnings management). Our study supports prior literature's findings that the change in the top management leads to organizational instability and higher accounting information risk. Our findings have implications for internal decisionmaking with regard to top executive replacement.

Date: 2014
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