An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Baruch Lev
New York University Leonard N. Stern School Of Business

Stephen G. Ryan
New York University

Min Wu
Hong Kong University of Science & Technology

Abstract: Accounting Standards by and large overlook the role of the historical record of financial information, requiring earnings restatements—the rewriting of earnings history—only in rare cases of errors or fraud. Using a sample of restatements of earnings, we show that the revision of the historical record significantly affects investors' decisions and predicts class action lawsuits. Specifically, restatements that eliminate or shorten histories of earnings growth or positive earnings have significantly more adverse effects for investor valuations than other restatements. The relevance to investors of such rewriting of earnings history raises the question whether firms should be required to routinely revise their historical financial information when the major assumptions and projections underlying that information are found to be materially or inconsistent with new data, and not just in cases of errors or fraud as currently prescribed by GAAP.

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