THESIS
2016
Abstract
This paper compares the differences in the determinants and consequences of accounting restatements between Canada and the U.S. We have four findings. First, Canadian firms make fewer restatements than their U.S. counterparts. Second, for both Canadian and U.S. firms, the discretionary accruals of restated firm-years are significantly higher than non-restated firm-years, but the difference is more pronounced in Canada than the U.S. Third, institutional investors and Big 4 auditors mitigate the discretionary accruals in restated firm-years relative to non-restated firm-years, but the effects are limited to the U.S. firms only. Fourth, investors react negatively to both Canadian and U.S. restatement announcements. Furthermore, restated firms experience a greater likelihood of auditor and...[
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This paper compares the differences in the determinants and consequences of accounting restatements between Canada and the U.S. We have four findings. First, Canadian firms make fewer restatements than their U.S. counterparts. Second, for both Canadian and U.S. firms, the discretionary accruals of restated firm-years are significantly higher than non-restated firm-years, but the difference is more pronounced in Canada than the U.S. Third, institutional investors and Big 4 auditors mitigate the discretionary accruals in restated firm-years relative to non-restated firm-years, but the effects are limited to the U.S. firms only. Fourth, investors react negatively to both Canadian and U.S. restatement announcements. Furthermore, restated firms experience a greater likelihood of auditor and CEO turnover than non-restated firms in both countries. Overall, our findings are consistent with the notion that poorer litigious environment in Canada relative to the U.S. is associated with a fewer detections of accounting misstatements and a poorer earnings quality in those restated firms of Canada. Our findings also lend support to the argument that firm-level governance complements country-level legal enforcement in monitoring corporate financial reporting practice.
Keywords: legal environment; restatement; discretionary accruals; market reaction; auditor change; CEO turnover
JEL Classifications: G38; M41; M48; K22; K41
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