Afshad J. Irani and Le (Emily) Xu
Effective August 23, 2004, the US Securities and Exchange Commission (SEC) requires all firms to disclose restatements via an item 4.02 Form 8‐K filing. However, a significant…
Abstract
Purpose
Effective August 23, 2004, the US Securities and Exchange Commission (SEC) requires all firms to disclose restatements via an item 4.02 Form 8‐K filing. However, a significant number of firms continue to disclose restatements using means other than an 8‐K. Commonly referred to as stealth restatements, the purpose of this paper is to investigate the materiality of restatements disclosed in either the 10‐K or the 10‐Q by comparing them to those disclosed via 8‐K.
Design/methodology/approach
Univariate and multivariate analyses compare the characteristics of and the market reaction to 10‐K/10‐Q restatements to those of 8‐K restatements.
Findings
The authors find stealth restatements are more likely to be those not affecting net income, with longer filing delays, not subject to SEC investigation and made by firms audited by non‐big four accounting firms. The authors document a negative market reaction to 8‐K restatements around the restatement disclosure date. However, for stealth restatements they find no market reaction around the 10‐K/10‐Q filing date and for up to 22 trading days after the 10‐K/10‐Q filings. Research limitations/implications – The study shows a significant difference in materiality between stealth and 8‐K restatements.
Practical implications
The study is important to investors, regulators and academics because it supports the notion that stealth restatements include less significant information relative to that disclosed in 8‐K restatements. This result is in line with the SEC disclosure requirement.
Originality/value
The significant number of stealth restatements since 2004 begs the question as to what kind of information is being disclosed in these restatements. The paper responds to this question.
Details
Keywords
The purpose of this paper is to explore the impact of a particular firm’s stakeholder orientation, particularly employee orientation, on corporate communications with stakeholders…
Abstract
Purpose
The purpose of this paper is to explore the impact of a particular firm’s stakeholder orientation, particularly employee orientation, on corporate communications with stakeholders concerning financial irregularities.
Design/methodology/approach
This study explores the impact of a particular firm’s stakeholder orientation, particularly employee orientation, on corporate communications with stakeholders concerning financial irregularities. Using a sample of 762 firm restatements, the authors separate their observations by disclosure transparency (high or low transparency of disclosure) and use logit regressions to examine whether companies with stronger employee orientation make more or less transparent restatement disclosures.
Findings
The findings show that higher levels of investment in employee orientation are associated with less transparent restatement disclosures. Further, examining a subsample of restatements in which managers may have greater discretion over how a restatement is disclosed confirms this finding. However, supplemental tests show that increased external monitoring may mitigate these effects.
Practical implications
The findings provide support that other stakeholders, such as shareholders, should weigh the potential pros/cons of management investments in corporate social responsibility (CSR). These concerns are more important now as firms continue to embrace a stakeholder-focused model of management which allocates resources to numerous stakeholder groups.
Originality/value
This paper extends the growing body of research that assesses the impact of CSR on firm outcomes (Kim et al., 2012; Guo et al., 2016; Hmaittane et al., 2019). Further, this paper contributes to the disclosure transparency literature by finding an association between CSR investment levels and the manner in which a firm discloses a restatement.