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Shine a Light: How Firm Responses to Announcing Earnings Restatements Changed After Sarbanes–Oxley

Abstract

We explore how the Sarbanes–Oxley Act of 2002 created pressure for firms to take more visible and costly corrective action following the announcement of an earnings restatement. Building on theory about focusing events, the institutional effects of legislative change, and the agenda-setting role of the media, we propose that Sarbanes–Oxley created reactive normative pressure on firms that announce earnings restatements, increasing the likelihood of CEO replacement in their aftermath. We theorize that Sarbanes–Oxley changed the meaning—and therefore the impact—of media coverage of earnings restatements. Our findings show that firm behavior after Sarbanes–Oxley did change in ways that are consistent with the intent of the legislation: to increase executives’ accountability for the reliability of their firms’ financial statements. Moreover, we show this change is a result both of the direct effect of the legislation on increasing CEO accountability as well as through intensifying the effect of the media spotlight on misconduct.

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Notes

  1. 1.

    DiMaggio and Powell (1983) use the term normative isomorphism to describe the spread of practices through professionalization. We note that they might describe the response to the pressure we describe here as proactive normative pressure (symbolic inter-firm imitation) as mimetic isomorphism. Nevertheless, we follow the organizational sociologists who term the pressure to comply symbolically with new legislation, leading to the emergence of new norms, as normative pressure (Dobbin et al. 1993; Edelman 1990, 1992; Sutton et al. 1994).

  2. 2.

    T-tests (available upon request) reveal the only differences in the variables of interest between firms with governance data and those without are related to firm size.

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Acknowledgements

We would like to thank Colleen Stuart, Adina Sterling, Brandy Aven, Kelly Patterson, Seemantini Pathak, Ming Leung, Andreea Gorbatai, Sameer Srivastava, Mathijs de Vaan, Simona Giorgi, Michaela DeSoucey, Sara Soderstrom, Margarethe Wiersema, and David Gomulya for their comments on earlier versions of this paper.

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Pozner, JE., Mohliver, A. & Moore, C. Shine a Light: How Firm Responses to Announcing Earnings Restatements Changed After Sarbanes–Oxley. J Bus Ethics 160, 427–443 (2019). https://doi.org/10.1007/s10551-018-3950-y

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Keywords

  • Earnings Restatements
  • Legislative change
  • CEO change
  • Media
  • Sarbanes–Oxley