Three essays on characteristics and economic consequences of financial statement restatements

This paper examines whether companies increase the conservatism of their reported income numbers following corrections of previously overstated earnings. We expect such a change in income recognition policy as managers attempt to restore earnings credibility. Similar to Basu (1997) and Watts (2003), we define accounting conservatism as recognizing bad news (economic losses) in a more timely fashion than recognizing good news (economic gains). We employ a sample of 2,132 restatements during the period 1999-2005. The results of our analyses are highly consistent across several combinations of conservatism measurement metrics, control sample strategies, and other robustness checks. In all cases we find the hypothesized increase in conservatism. We also find that increased conservatism is more evident among overstating companies that made improvements in their corporate governance.;Key Words: earnings restatement, accounting conservatism, corporate governance, income recognition.