Earnings Restatements, the Sarbanes-Oxley Act and the Disciplining of Chief Financial Officers

We investigate involuntary chief financial officer (CFO) turnover following earnings restatements, the labor market penalties imposed on former restatement-firm CFOs, and whether these disciplinary consequences have increased following the passage of the Sarbanes-Oxley Act of 2002 (SOX). Our results suggest that, relative to a control group of non-restating firms, firms restating earnings have higher rates of involuntary CFO turnover, and that former restatement-firm CFOs face stiff labor market penalties. We generally find that the passage of SOX has not increased involuntary CFO turnover rates following restatements. However, we find that labor market penalties for former CFOs of restatement firms are more severe in the post-SOX period, suggesting that SOX has increased ex post settling up costs. Our results suggest that the influence of SOX on the labor market has resulted in CFOs being held more accountable for their actions.

[1]  Suraj Srinivasan.  Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members , 2004 .

[2]  Shehzad L. Mian.  On the choice and replacement of chief financial officers , 2001 .

[3]  Scott Richardson.  Discussion of Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members , 2005 .

[4]  R. Cyert,et al.  Theory of the Firm , 1966 .

[5]  S. Balsam,et al.  The Effect of Equity Compensation on Voluntary Executive Turnover , 2007 .

[6]  John M. Barron,et al.  Executive compensation. , 1990, Trustee : the journal for hospital governing boards.

[7]  The Reputational Penalty for Aggressive Accounting: Earnings Restatements and Management Turnover , 2004 .

[8]  Catherine M. Dalton,et al.  A changing of the guard: executive and director turnover following corporate financial restatements , 2005 .

[9]  Charles J. Hadlock,et al.  Management Turnover Across the Corporate Hierarchy , 2004 .

[10]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[11]  M. D. Beneish,et al.  Incentives and Penalties Related to Earnings Overstatements that Violate GAAP , 1999 .

[12]  M. C. Jensen,et al.  Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit , 1976 .

[13]  H. Manne.  Our Two Corporation Systems: Law and Economics , 1967 .

[14]  Jeffrey L. Callen,et al.  Accounting Restatements , 2005 .

[15]  Min Wu,et al.  Earnings Restatements: A Capital Market Perspective , 2002 .

[16]  Jeffrey J. Burks.  Sarbanes-Oxley and the effect of restatements on CEO and CFO compensation and turnover , 2007 .

[17]  Vernon J. Richardson,et al.  Determinants of Market Reactions to Restatement Announcements , 2001 .

[18]  Stuart C. Gilson.  Management turnover and financial distress , 1989 .

[19]  William R. Kinney,et al.  Characteristics of firms correcting previously reported quarterly earnings , 1989 .

[20]  Edward L. Maydew,et al.  How Much Will Firms Pay for Earnings that Do Not Exist? Evidence of Taxes Paid on Allegedly Fraudulent Earnings , 2002 .

[21]  Mengxin Zhao,et al.  CEO Turnover after Acquisitions: Are Bad Bidders Fired? , 2006 .

[22]  Karen Hennes Smeal.  Management Intent and CEO and CFO Turnover around Earnings Restatements : Evidence from the Post-Enron Era , 2007 .

[23]  E. Fama.  Agency Problems and the Theory of the Firm Author ( s ) : , 2007 .

[24]  Scott A. Richardson,et al.  Predicting Earnings Management: The Case of Earnings Restatements , 2002 .

[25]  H. Manne,et al.  Mergers and the Market for Corporate Control , 1965, Journal of Political Economy.

[26]  Jerold B. Warner,et al.  Stock prices and top management changes , 1988 .

[27]  R. Parrino,et al.  CEO turnover and outside succession A cross-sectional analysis , 1997 .