Financial Restatements: Implications for Management Earnings Forecasts

This study investigates how financial statement restatements influence managers' subsequent voluntary disclosure behavior and investor response to such disclosures. I find that following financial restatements restating firms are less likely to issue a voluntary earnings forecast. To the extent that firms do issue forecasts, however, the post-restatement forecasts are more timely and more accurate (ex post) than pre-restatement forecasts. Further, investor response to management forecasts is moderated after restatements. Further analyses indicate that investors discount bad-news forecasts, but not good-news forecasts. This finding suggests an asymmetric loss function associated with the two types of forecasts. In sum, financial restatements alter not only voluntary disclosure behavior but also the market's reaction to such disclosures.