The impact of accounting restatements on CFO turnover and bonus compensation: Does securities litigation matter?

Corporate litigation and executive turnover

“…Such market-based penalties serve to limit incentives for managers to engage in misconduct in the financial market (Aitken et al, in this issue; Cumming et al, in this issue). For example, Romano (1991), Niehaus and Roth (1999) and Collins et al (2008) document increased CEO turnover surrounding securities class actions and accounting restatements. Proceedings initiated by the Securities and Exchange Commission ('SEC') similarly affect CEO turnover of the accused company, as documented by Karpoff et al (2008) and Correia and Klausner (2012).…”

Disciplinary measures in response to restatements after Sarbanes–Oxley

“…I find that as boards reduce their propensity to terminate CEOs after SOX, they increase their propensity to withhold bonuses. Collins et al (2008) (CRS) also examine the relation between bonus compensation and restatements, but their examination of changes in the relation around SOX is minimal. In general, CRS find that restatements tend to decrease bonus compensation.…”

Board, audit committee and restatement-induced class action lawsuits

“…They identify 39 class action firms with accounting allegations centered on restatements in the period of 1996-2000. Collins et al (2008), have 30 class action firms in their sample of 81 restating firms in the period of 1997 to 2003.…”

“…Collins, Reitenga, and Sanchez (2008) find that CFO turnovers are affected by restatements, but only when the restatement firm is the target of a class-action suit. They interpret this evidence as consistent with classaction securities litigation being a significant externally-imposed governance measure that explains ex post settling-up associated with the restatement event.…”