This study examines the conditions under which the Securities and Exchange Commission (SEC) exercises enforcement leniency following a restatement. I explore whether cooperation with SEC staff and forthright disclosure of a restatement (e.g., disclosures reported in a timely and visible manner) reduce the likelihood of an SEC sanction or SEC monetary penalties. After controlling for restatement severity, I find that cooperation increases the likelihood of being sanctioned, perhaps because it improves the SEC's ability to build a successful case against the firm. However, cooperation and forthright disclosures are rewarded by the SEC through lower monetary penalties.

ABSTRACT Although firms are encouraged by the SEC and Department of Justice to conduct internal investigations following financial misconduct, prior research finds few benefits for investigating firms. This study examines a novel aspect of internal investigations—namely, whether the investigation is conducted by independent versus nonindependent teams—and explores the impact of these teams on investigation outcomes. Consistent with our predictions, we find that firms whose internal investigations are led by independent teams are more likely to retain external advisors, have a higher likelihood of CEO turnover, and face a lower likelihood of an SEC enforcement action than do firms whose investigations are led by nonindependent teams. Our findings demonstrate that the SEC grants enforcement leniency to firms that conduct an internal investigation, but this finding only holds when the investigation leader is considered independent. These results also suggest that appointing independent groups to lead internal investigations protects the firm, at the expense of the CEO, following accounting fraud. Our paper has important implications for researchers studying accounting irregularities as we are the first to show that independent board members and external advisors play a direct role in the resolution of financial misconduct through their job on the internal investigation team.

Abstract We investigate whether restatements announced by economically related firms influence the contract terms a borrower receives from lenders. A restatement by a major customer firm increases the loan spread of a borrower by 11 basis points, on average. The contagion effects of customer restatements are higher (45 basis points) when a borrower's switching costs are high. Restatements by peer firms in the same industry also increase a borrower's loan spread, and this increase occurs regardless of restatement severity. Moreover, the sensitivity of loan spread to peer restatements is significantly greater when the restating peer firms are also in the bank's lending portfolio, suggesting that a lender's personal experience with restatements in an industry makes it more attuned to the potential implications of these restatements for the borrowing firm. Finally, our results suggest that lenders utilize information from peer restatements to anticipate future restatements by the borrowing firm.

ABSTRACT: Managers exercise considerable discretion over how they announce an accounting restatement in a press release. Some firms issue a press release that discloses the restatement in the headline (high prominence). Others provide a press release with a headline on a different subject (for example, earnings news) but describe the restatement in the body of the release (medium prominence). The remaining firms discuss the restatement at the end of the press release in a footnote to operating results (low prominence). Mean three-day returns differ considerably across these three categories of prominence (−8.3, −4.0, and −1.5 percent, respectively). We find that disclosure prominence is significantly negatively associated with returns in a model that controls for the seriousness of the GAAP violation, restatement magnitude, other restatement characteristics, and potential endogeneity. Similarly, we find the likelihood of class action lawsuits is significantly reduced with less prominent disclosure.

ABSTRACT Following securities law violations, regulators can require firms to hire a corporate monitor to implement reforms that limit future misconduct and protect investors. We examine the determinants of including a corporate monitor as equitable relief in an enforcement action, as well as their effectiveness in promoting positive change at a firm. Using a structural equation model that jointly determines monetary and nonmonetary sanctions, we find that monitor assignments are related to the nature of the offense, violation severity, and investor harm. We also find that monitors with targeted accounting oversight responsibilities are associated with improved corporate culture, a higher likelihood of financial restatements during their tenure, and enhanced financial reporting credibility at the firms they oversee relative to enforcement firms without such monitors. Although corporate monitors can foster positive change, their impact depends on the scope of their responsibilities. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: K22; M14; M41; M42; M48.

ABSTRACT Regulators claim to reward firm cooperation in the enforcement process. However, critics question which actions constitute firm cooperation and contend that cooperation leads to “harsh” and “unfair” outcomes. Examining 1,162 enforcement actions for financial misrepresentation initiated by the Securities and Exchange Commission and Department of Justice, we find that regulator-cited cooperation credit is best explained by remedial actions and self-reported law violations. Cooperation credit is negatively associated with firm monetary penalties assessed by regulators. Our estimates suggest that firms with cooperation credit realize an average penalty reduction of $23.8 million (49 percent). We also estimate that average reputation-related losses are $756 million (70 percent) lower for firms with cooperation credit. We find no association between cooperation credit and related private action outcomes. Our results provide important insight into what constitutes meaningful cooperation with regulators, and suggest that the benefits can be substantial for firms deemed to be cooperative. JEL Classifications: G38; K22; K42; M41.

ABSTRACT: We find that the likelihood of forced turnover in the CEO and CFO positions is significantly higher for firms in the aftermath of option backdating than in propensity-score matched control firms. Forced turnover occurs in about 36 percent of the accused firms. The forced turnover rates for CEOs and CFOs are similar and several times higher than normal. The displaced managers are further punished by the managerial labor market, as they are much less likely than control firm managers to be rehired at comparable positions. We also find that backdating firms restructure CEO compensation to rely less on stock options. Finally, we learn the higher turnover extends to the General Counsel. While boards are often viewed as unresponsive to criticisms involving executive compensation, they did respond quite decisively to option backdating allegations and the accompanying adverse publicity. Data Availability: All data used in this study are publicly available from the sources indicated.