American Accounting Association 2006 Midwest Region Meeting March 30 – April 1 Chicago, Illinois

Friday, March 31, 9:40 a.m. - 10:20 a.m.
Forum Papers

Title: Tax Refunds on Overstated Earnings: Are Firms Benefiting Twice?

Natalie Tatiana Churyk Northern Illinois University

Katrina L. Mantzke Northern Illinois University

ABSTRACT: The number of financial statement restatements practically doubled from 1998 to 2002. Approximately 37% of these restatements are related to revenue recognition, with most of these resulting in an original overstatement of earnings. Many researchers are investigating these restatements to provide a clearer picture of this financial reporting phenomenon.

While prior literature has focused on the negative consequences to firms from reporting a restatement, our study looks for a mitigating effect from reporting good news along with the bad. Our study focuses on the impact that a restatement announcement including tax refund information has on firm value. We contend, and find, that firms are benefiting from the information content provided during a simultaneous announcement containing restatement and tax refund information.

Through the use of a survey, this study provides answers as to whether analysts place a higher value on firms that signal a partial recovery of restatement losses through tax refunds versus firms that cannot benefit from tax refunds. Results of a pilot study suggest a significant difference between the two cases (p < 0.02). This study contributes to the literature on signaling and earnings management because this study has been designed to tease out the signaling effect (announcement of the refund) from the earnings management effect (financial restatement).

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