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The Reputational Penalty For Aggressive Accounting: Earnings Restatements And Management Turnover, Hemang Desai, Chris E. Hogan, Michael S. Wilkins

School of Business Faculty Research

In this paper we investigate the reputational penalties to managers of firms announcing earnings restatements. More specifically, we examine management turnover and the subsequent re-hiring of displaced managers at firms announcing earnings restatements during 1997 or 1998. In contrast to prior research (Beneish 1999 and Agrawal, Jaffe and Karpoff, 1999), which does not find increased turnover following GAAP violations or revelation of corporate fraud, we find that 60% of restating firms experience a turnover in at least one top manager within 24 months of the restatement compared to only 35% among age-, size- and industry-matched firms. Moreover, 85% of the …