Do Restatements Generate Contagion? A Re-Examination

Studies provide conflicting evidence on what accounting restatements reveal about industry peers. Gleason, Jenkins, and Johnson (2008) suggest that restatements reflect contemporaneous earnings management, while Kedia, Koh, and Rajgopal argue that restatements induce peers to begin misstating earnings. We re-examine peers’ reporting responses to restatements and find that the results of Kedia, Koh, and Rajgopal (2015) are sensitive to design choices that affect the measurement of key variables. When this measurement error is minimized, we find no evidence that peers begin misstating following restatements. Using nonrestatement-based measures, we find that peers exhibit less aggressive reporting, especially when prior accrual use is high and when peers share the same auditor office. Overall, industry peers do not appear to increase earnings management following restatements. Instead, restatements primarily reflect contemporaneous misreporting and, in some cases, lead to less aggressive reporting by peers.