Non-financial Corporate Misconduct and Earnings Restatements

Purpose This study examines the relation between penalties for non-financial regulatory violations and earnings restatements. Financial and non-financial corporate misconduct have been shown to be associated through channels such as shared internal controls and corporate culture. Methodology Using corporate misconduct data from the Violation Tracker dataset and coarsened exact matching or entropy balancing to match penalty firm-years with otherwise similar non-penalty firm-years, I examine the relation between regulatory penalties and concurrent and future earnings restatements. Findings I find earnings are significantly more likely to be restated in years when the firm is assessed a regulatory penalty. In addition, penalties strongly predict both the presence and number of earnings restatements in future years. Originality My findings extend our understanding of the relation between financial and non-financial corporate misconduct by applying modern econometric techniques to a significantly more extensive dataset than prior literature. Practical/Social Implications My results suggest penalties for non-financial misconduct are an important leading indicator for earnings restatements and can help stakeholders identify as yet undetected financial reporting problems. Stakeholders may choose to decrease their reliance on the financial statements if a penalty is assessed, and regulatory bodies may consider sharing information across agencies to exploit synergies in monitoring activities.