Pre-restatement executive turnovers and investor reactions

Abstract

This study investigates the relation between fraudulent financial restatements and executive turnovers prior to the public announcement of the restatements. We find that restating firms are significantly more likely to experience CEO or CFO turnovers before restatement announcements, suggesting that firms take proactive actions in response to financial misreporting. The turnover likelihood is higher for CEOs than CFOs. Our analysis also reveals that investors react negatively to pre-restatement CFO turnovers, but the reactions to CEO turnovers are insignificant. This finding suggests that investors perceive CFO turnovers as indicative of undisclosed financial reporting issues, while CEO turnovers convey mixed signals to investors when there is a lack of clear reasons behind the turnovers. Further, our results show that at the time of the subsequent restatement announcement, firms with pre-restatement CEO turnovers experience more pronounced negative abnormal returns, a pattern not observed with CFO turnovers. Additionally, analysis of year-to-year change in discretionary accruals indicates that pre-restatement turnovers do not immediately enhance financial reporting quality. Overall, our study fills a gap in existing literature by demonstrating how the timing of executive turnovers around significant business events affects investor reactions to both the turnover and subsequent business events.