Accounting Restatements and Bank Liquidity Creation

Banks play a central role in creating liquidity for the economy by financing illiquid assets with liquid liabilities. This paper examines the effect of accounting restatements on bank liquidity creation. Using a difference-in-differences research design, I show that restatements trigger a significant reduction in liquidity creation. This effect derives mainly from banks shifting away from illiquid assets and toward liquid assets. Further analysis reveals that restatements affect liquidity creation through supervisory enforcement actions and unravelling of risk exposures accumulated in the misreporting period. Government deposit insurance blunts the effect of an information asymmetry channel.

Financial Statement Aggressiveness Related to Tax Accounts and Tax-Related Accounting Misstatements

ABSTRACT In this study, we examine two questions: (1) whether financial statement aggressiveness related to tax accounts is associated with the likelihood of having tax-related misstatements in the financial statements, and (2) whether the disclosure of the need to restate prior years' financial statements for a tax-related reason influences tax-related financial statement aggressiveness related to tax accounts in the fiscal year of announcement. Recent evidence of an increase in the rate of tax-related accounting restatements motivates these questions. In this study, we find empirical evidence suggesting that tax-related financial statement aggressiveness is positively associated with the likelihood of having tax-related misstatements in the financial statements. We also find that in the year in which the need to restate prior years' financial statements is announced, companies with tax-related misstatements in their financial statements appear to be less tax-related financial statement aggressive compared to the control group.

Multiple Regulators and Accounting Restatements: Evidence from Canada

ABSTRACT Canada delegates securities regulation to the provincial securities regulators where each Canadian firm is headquartered. Legal origin theories predict weaker enforcement due to less emphasis on accounting in civil law jurisdictions, like Quebec. Consistent with these theories, we find fewer restatements for non-U.S. cross-listed firms headquartered in Quebec relative to the rest of Canada (ROC), which has a common law legal origin. When subject to two securities regulators—a Canadian provincial securities regulator and the Securities and Exchange Commission—Quebec firms cross-listed in the U.S. restate at a rate similar to the ROC. Finally, we document that Canadian firms restate less frequently after adopting IFRS, consistent with more principles-based standards being more difficult to enforce ex post than more rules-based standards.