The Association between Executive Pay Structure and the Transparency of Restatement Disclosures

Abstract

SYNOPSIS Restatement disclosures have evolved into two basic categories: reissuances (Big “R”) and revisions (little “r”). A reissuance restatement requires an 8-K filing, whereas a revision restatement can be disclosed in less transparent ways. The high-transparency of a reissuance restatement disclosure (8-K) results in a greater likelihood of negative effects on companies, executives, and auditors (e.g., Plumlee and Yohn 2008; Burks 2010). Determining whether an 8-K filing is required involves judgment regarding materiality of the restatement, thus creating ambiguity as to the correct disclosure method. Such judgment also introduces the potential to opportunistically choose the method of disclosure. We study the restatement disclosure choices of companies to examine whether executive pay structure is associated with disclosure transparency. Using a sample of 1,178 restatements from the years 2004 through 2013, our results show that as the equity proportion of executive pay increases, the likelihood of a high-transparency disclosure decreases. However, as the difference in pay structure between the CEO and CFO increases, the likelihood of a high-transparency disclosure increases. Overall, our results suggest that executive pay structure influences disclosure choice and that pay structure differences between the CEO and CFO may mitigate such influence. Data Availability: All data are available from public sources identified in the paper.

Immaterial Error Corrections and Financial Reporting Reliability*

“…Second, our findings on the consequences of immaterial errors extend prior research on the determinants of materiality judgments (e.g., Keune and Johnstone 2009;Acito et al 2009;Tan and Young 2015;Hogan and Jonas 2016). Our evidence that immaterial errors predict future reporting unreliability suggests immaterial errors are a useful indicator of largely unobservable lower level control deficiencies (i.e., less severe than material weakness, which is disclosed).…”

“…We also extend prior research, summarized in Figure 1 and Appendix 1, that focuses on determinants of management's materiality decisions (e.g., Keune and Johnstone 2009;Acito et al 2009), including classifications of error corrections as revisions versus restatements (e.g., Tan and Young 2015;Hogan and Jonas 2016). In contrast, our analysis takes as given the designation of an error as immaterial and evaluates the consequences of immaterial errors, comparing them to the consequences of restatements.…”

The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research

“…In contrast to these studies, according to Bao et al (2021), CEO pay ratio and restatements are positively linked, while CEO power strengthens and CEO ability weakens this relationship. Hogan and Jonas (2016) found that CEO and CFO equity proportion increases and difference in CEO and CFO pay structure decreases restatements. However, Ghafoor et al (2019) reported an insignificant relationship between CEO equity compensation and enforcement activities.…”

Board compensation and disclosure quality: corporate governance interference

“…They concluded that contrary to the expectations, directors choose contracts according to their private information and these choices have an effect on stock prices. Hogan & Jonas (2016) examined the structure of compensation payment and transparency of financial statements restatement. The results illustrated that the growth in bonus paid to the managers in form of stocks reduces the transparency of disclosure quality.…”