Effect Of Financial Restatements On Business Growth

Financial statements are an important mechanism to convey firm specific information to dispersed shareholders. A firm will undertake a restatement voluntarily or at the urging of the firm’s auditors or regulators. In recent years, financial restatements occur frequently and are increasing. About the study of reasons of financial statements, there is a consistent result at home and abroad. The reasons are both of capital market financing conditions and self-interested behavior of managers. But in terms of the effects on firm grows, there are not the same result. Some scholars believe that the financial restatements affect business growth through external financing. Another part of scholars believe that financial restatements affect growth through internal cash flow.We empirically evaluate these arguments by using the standard sales growth based financial planning model. In carrying out our analysis, we distinguish the effects of restatement on overall firm growth as well as its components of internally and externally financed growth. Our findings suggest that overall firm growth rates decline following a restatement. Furthermore, we find that accounting restatements have a greater adverse impact on externally financed growth rates. We also find that not all restatements yield identical effects: the impact of restatements is more pronounced for the subsample of firms identified to have undertaken the more egregious fraudulent reporting than the subsample of firms that reported restatements to correct previous accounting errors. Finally, we find that firms with severe restatements, measured based on announcement period market reactions, have lower externally financed growth. Overall, our evidence highlights the adverse impact of restatement on firm growth, particularly through external financing.