Corporate governance changes following earnings restatements

This dissertation investigates whether firms that restate previously released financial reports implement subsequent changes in internal governance in an effort to correct underlying problems that contributed to the need for restatement in the first place. Restatements might be expected to spur improvements to corporate governance. On the other hand, perhaps entrenched and/or overconfident managers do not initiate governance changes. Also, governance changes may be less likely following relatively technical restatements.; Various likely responses to financial reporting problems, including board, audit, and management changes, are indexed into a single measure in an effort to assess the joint strength of multiple corporate governance attributes within a firm. The results indicate that corporate governance changes are most likely following income-decreasing restatements, when there are declines in prior firm performance, and in larger firms. In these circumstances, firms appear to understand the value in strengthening their corporate governance. On the other hand, they are least likely following technical revenue recognition restatements involving Staff Accounting Bulletin No. 101, when the governance level in the pre-restatement period is high, and when there is a gain in the market value of the firm following its announcement of restatement. Due to the nature of these types of restatements, regulators might deem intervention in these circumstances unnecessary. However, in a variety of other types of restatements, the benefits of regulation to correct the problems that prompted the misreporting and the eventual need for restatement are more apparent.; This study makes several contributions. First, it classifies Government Accountability Office restatements more finely on the basis of presence of fraud, prompter, magnitude, severity, and reason for the restatement. Where prior studies consider only selective changes, this study examines the joint impact of changes to multiple governance attributes. Furthermore, this study recognizes that responses to restatements likely relate to particular characteristics of the restatement as well as to individual firm characteristics that were present in prompting the need for restatement. Accordingly, this investigation relates the nature and magnitude of a restatement with the likelihood of changes designed to strengthen the weaknesses in governance attributes that might have contributed to misstatement.