Effects of financial restatements on top management team dismissal

Purpose – The purpose of this paper is to analyze the effects of financial restatements (FRs) on the likelihood of the top management team (TMT) dismissal. It investigates the effects of types of FRs [corrective note and reissuance of financial statement (RFS)], of FR severity and of FR related to international financial reporting standards (IFRSs) easy or difficult-to-estimate. Design/methodology/approach – The authors hand-collect: data about 96 FRs from the Italian public oversight board documents; chief executive officer (CEO) name, chairman name, year of the financial statement under investigation, total assets and operating income, from their financial statement. The authors use multivariate regression to test the effects of FRs on the probability of TMT dismissal. Findings – The authors find that the RFS leads to a higher likelihood of chairman dismissal. A greater magnitude of misrepresentation on income statements, and FRs, which decrease net income, increase the likelihood of CEOdismissal. Difficult-to-estimate IFRSs increases the likelihood of CEOdismissal. Originality/value – FRs are significant determinants of the CEO/chairman dismissal. The authors show that FRs directly involving shareholders (RFS) have negative consequences on the chairman of the board of directors, while the CEO is more affected by FRs that involve technical factors (FR severity or financial statement associated with difficult-to-estimate IFRSs). Keywords Financial restatements, Chief executive officer dismissal, Chairman dismissal, Financial reporting