Accounting restatements and corporate cash policy


Student thesis: Doctoral Thesis

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  • Huili CHEN

Related Research Unit(s)


Awarding Institution
Award date2 Oct 2015


This thesis studies how financial reporting quality affects a firm’s cash policy by examining the change in corporate cash holdings after the announcement of accounting restatements. Using a difference-in-differences approach, I find that firms increase their cash holdings after the announcement of restatements. The effect is concentrated in the restatements due to accounting irregularities. In addition, the increase in cash holdings after the restatements due to irregularities is more pronounced for the firms that rely more on external capital to finance their investments and the firms that do not take remedy actions after the restatements to restore investors’ confidence. These results are economically significant and robust to various matching firms, sample period, and model specifications. The evidence also shows that the effect of restatements on corporate cash policy is long-lasting. Finally, in the additional analyses, I find that the irregularity restatement firms have a higher propensity to save cash from operating cash flows after the announcement of the restatements, and the market value of cash holdings in these firms is also higher after the restatements. Overall, these results suggest that firms increase cash holdings after the accounting restatements because cash reserves become more valuable in safeguarding against future shortfalls of internal funds. This study contributes to the literature on the real effect of accounting information quality (Dechow, Ge, and Schrand, 2010).

    Research areas

  • Corporations, Financial statements, Cash position, Cash management.