IDEAS home Printed from https://ideas.repec.org/a/spr/sjobre/v76y2024i4d10.1007_s41471-024-00193-3.html
   My bibliography  Save this article

Changes in the Perception of Error Announcements from the German Two-Tier Enforcement

Author

Listed:
  • Marc Berninger

    (Technical University of Darmstadt)

Abstract

When the German financial reporting enforcement was introduced in 2004, the legislator chose an innovative approach: He combined a private enforcement institution with a governmental agency while sanctioning was carried out solely by publicly announcing identified accounting errors. Subsequently, investors were confronted with up to then unprecedented ‘error announcements’ from the enforcement system. For a sample of 213 announcements from 2006 to 2019, the paper analyzes the adaptation process of investors to this new information. While significant negative market reactions around the announcement dates can be found for the whole observation period, the results also show that the investors’ views of the error announcements change over time. Especially in the early years, the observed market reactions are strongly linked to the impact of the accounting error on the firm’s financial situation. This link weakens over time and factors related to the nature of the error become more important to investors. In particular, errors that are attributable to the unjustifiable application of professional judgment lead to significantly more negative effects.

Suggested Citation

  • Marc Berninger, 2024. "Changes in the Perception of Error Announcements from the German Two-Tier Enforcement," Schmalenbach Journal of Business Research, Springer, vol. 76(4), pages 613-639, December.
    • Handle: RePEc:spr:sjobre:v:76:y:2024:i:4:d:10.1007_s41471-024-00193-3
    DOI: 10.1007/s41471-024-00193-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s41471-024-00193-3
    File Function: Abstract
    Download Restriction: no
    File URL: https://libkey.io/10.1007/s41471-024-00193-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Keith L. Jones & Gopal V. Krishnan & Kevin D. Melendrez, 2008. "Do Models of Discretionary Accruals Detect Actual Cases of Fraudulent and Restated Earnings? An Empirical Analysis," Contemporary Accounting Research, John Wiley & Sons, vol. 25(2), pages 499-531, June.
    2. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    3. Suraj Srinivasan, 2005. "Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members," Journal of Accounting Research, Wiley Blackwell, vol. 43(2), pages 291-334, May.
    4. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    5. Katsiaryna Salavei Bardos & Joseph Golec & John P. Harding, 2013. "Litigation Risk And Market Reaction To Restatements," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(1), pages 19-42, January.
    6. Patricia M. Dechow & Richard G. Sloan & Amy P. Sweeney, 1996. "Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 1-36, March.
    7. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 193-228.
    8. Brian J. Bushee & John E. Core & Wayne Guay & Sophia J.W. Hamm, 2010. "The Role of the Business Press as an Information Intermediary," Journal of Accounting Research, Wiley Blackwell, vol. 48(1), pages 1-19, March.
    9. Li, Feng, 2008. "Annual report readability, current earnings, and earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 221-247, August.
    10. Doyle, Jeffrey & Ge, Weili & McVay, Sarah, 2007. "Determinants of weaknesses in internal control over financial reporting," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 193-223, September.
    11. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 2006. "What Works in Securities Laws?," Journal of Finance, American Finance Association, vol. 61(1), pages 1-32, February.
    12. Begoña Giner Inchausti, 1997. "The influence of company characteristics and accounting regulation on information disclosed by Spanish firms," European Accounting Review, Taylor & Francis Journals, vol. 6(1), pages 45-68, May.
    13. Tan Xu & Mohammad Najand & Douglas Ziegenfuss, 2006. "Intra‐Industry Effects of Earnings Restatements Due to Accounting Irregularities," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 696-714, June.
    14. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    15. Danny Busch, 2022. "The future of EU financial law," Capital Markets Law Journal, Oxford University Press, vol. 17(1), pages 52-94.
    16. Brandon C. L. Morris & Jared F. Egginton & Kathleen P. Fuller, 2019. "Return and liquidity response to fraud and sec investigations," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(2), pages 313-329, April.
    17. Firth, Michael & Rui, Oliver M. & Wu, Wenfeng, 2011. "Cooking the books: Recipes and costs of falsified financial statements in China," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 371-390, April.
    18. Jörg-Markus Hitz & Henning Schnack, 2019. "Firm Disclosures about Enforcement Reviews," Accounting in Europe, Taylor & Francis Journals, vol. 16(1), pages 82-105, January.
    19. John Preiato & Philip Brown & Ann Tarca, 2015. "A Comparison of Between-Country Measures of Legal Setting and Enforcement of Accounting Standards," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 1-50, January.
    20. Marcus Brocard & Benedikt Franke & Dennis Voeller, 2018. "Enforcement Actions and Auditor Changes," European Accounting Review, Taylor & Francis Journals, vol. 27(3), pages 407-436, May.
    21. Karpoff, Jonathan M. & Lee, D. Scott & Martin, Gerald S., 2008. "The Cost to Firms of Cooking the Books," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(3), pages 581-611, September.
    22. Berninger, Marc & Bossong, Paul & Schiereck, Dirk & Steinhardt, Marcel, 2023. "Too transparent for signalling? A global analysis of bond issues by property companies," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 149020, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    23. Contessi, Silvio & De Pace, Pierangelo, 2021. "The international spread of COVID-19 stock market collapses," Finance Research Letters, Elsevier, vol. 42(C).
    24. Marc Berninger & Paul Bossong & Dirk Schiereck & Marcel Steinhardt, 2023. "Too transparent for signalling? A global analysis of bond issues by property companies," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3125-3145, September.
    25. Hecker, Renate & Wild, Andreas, 2012. "The market effects of the German two-tier enforcement of financial reporting," Tübinger Diskussionsbeiträge 334, University of Tübingen, School of Business and Economics.
    26. Buzby, Sl, 1975. "Company Size, Listed Versus Unlisted Stocks, And Extent Of Financial Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 13(1), pages 16-37.
    27. Axel Haller, 2002. "Financial accounting developments in the European Union: past events and future prospects," European Accounting Review, Taylor & Francis Journals, vol. 11(1), pages 153-190.
    28. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    29. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    30. J�rgen Ernstberger & Michael Stich & Oliver Vogler, 2012. "Economic Consequences of Accounting Enforcement Reforms: The Case of Germany," European Accounting Review, Taylor & Francis Journals, vol. 21(2), pages 217-251, August.
    31. Palmrose, Zoe-Vonna & Richardson, Vernon J. & Scholz, Susan, 2004. "Determinants of market reactions to restatement announcements," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 59-89, February.
    32. Axel Berger, 2010. "The Development and Status of Enforcement in the European Union," Accounting in Europe, Taylor & Francis Journals, vol. 7(1), pages 15-35, June.
    33. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
    34. Lang, M & Lundholm, R, 1993. "Cross-Sectional Determinants Of Analyst Ratings Of Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 246-271.
    35. Peter Iliev & Jonathan Kalodimos & Michelle Lowry, 2021. "Investors’ Attention to Corporate Governance [The “Wall Street Walk” and shareholder activism: Exit as a form of voice]," The Review of Financial Studies, Society for Financial Studies, vol. 34(12), pages 5581-5628.
    36. Katharina Hombach & Thorsten Sellhorn, 2022. "Does every accounting issue need a solution?," Accounting and Business Research, Taylor & Francis Journals, vol. 52(5), pages 540-561, July.
    37. Tan Xu & Mohammad Najand & Douglas Ziegenfuss, 2006. "Intra-Industry Effects of Earnings Restatements Due to Accounting Irregularities," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 696-714.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Georg Reischauer & Thomas Hess & Thorsten Sellhorn & Erik Theissen, 2024. "Transparency in an Age of Digitalization and Responsibility," Schmalenbach Journal of Business Research, Springer, vol. 76(4), pages 483-494, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    2. Marie Herly & Jan Bartholdy & Frank Thinggaard, 2020. "A re‐examination of accruals quality following restatements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 882-909, July.
    3. Laure de Batz & Evžen Kočenda, 2024. "Financial crime and punishment: A meta‐analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 38(4), pages 1338-1398, September.
    4. Dan Amiram & Zahn Bozanic & James D. Cox & Quentin Dupont & Jonathan M. Karpoff & Richard Sloan, 2018. "Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature," Review of Accounting Studies, Springer, vol. 23(2), pages 732-783, June.
    5. Marie Herly & Nikolaj Niebuhr Lambertsen, 2023. "Restatement costs and reporting bias," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(1-2), pages 91-117, January.
    6. Ma, Liangbo & Ma, Shiguang & Tian, Gary, 2016. "Family control, accounting misstatements, and market reactions to restatements: Evidence from China," Emerging Markets Review, Elsevier, vol. 28(C), pages 1-27.
    7. Lerong He & Rong Yang & Yuanlong He, 2018. "Does social exchange relationship impair audit committee effectiveness?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(2), pages 219-249, June.
    8. Matthew Notbohm & Katherine Campbell & Adam R. Smedema & Tianming Zhang, 2019. "Management’s personal ideology and financial reporting quality," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 521-571, February.
    9. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    10. Badolato, Patrick G. & Donelson, Dain C. & Ege, Matthew, 2014. "Audit committee financial expertise and earnings management: The role of status," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 208-230.
    11. Elizabeth Gordon & Elaine Henry & Marietta Peytcheva & Lili Sun, 2013. "Discretionary disclosure and the market reaction to restatements," Review of Quantitative Finance and Accounting, Springer, vol. 41(1), pages 75-110, July.
    12. Hoberg, Gerard & Lewis, Craig, 2017. "Do fraudulent firms produce abnormal disclosure?," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 58-85.
    13. Muhammad Kaleem Khan & Yixuan Qin & Chengsi Zhang, 2022. "Financial structure and earnings manipulation activities in China," The World Economy, Wiley Blackwell, vol. 45(8), pages 2593-2621, August.
    14. David F. Larcker & Anastasia A. Zakolyukina, 2012. "Detecting Deceptive Discussions in Conference Calls," Journal of Accounting Research, Wiley Blackwell, vol. 50(2), pages 495-540, May.
    15. Florian Eugster & Alexander F. Wagner, 2021. "Earning investor trust: The role of past earnings management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(1-2), pages 269-307, January.
    16. Lin, Hsien-Ping & Walker, M. Mark & Wang, Yung-Jang, 2020. "Shareholder wealth effects of corporate fraud: Evidence from Taiwan’s securities investor and futures trader protection act," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 222-243.
    17. Lerong He & Rong Yang, 2014. "Does Industry Regulation Matter? New Evidence on Audit Committees and Earnings Management," Journal of Business Ethics, Springer, vol. 123(4), pages 573-589, September.
    18. Oz, Seda, 2024. "The impact of terrorist attacks and mass shootings on earnings management," The British Accounting Review, Elsevier, vol. 56(3).
    19. Fargher, Neil & Wee, Marvin, 2019. "The impact of Ball and Brown (1968) on generations of research," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 55-72.
    20. Catalin Mos, 2024. "Uncertainty, Financial Reporting Quality and Accounting Enforcement: Evidence from The European Union," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 23(3), pages 616-642, September.

    More about this item

    Keywords

    Accounting errors; Adaptation; Enforcement; FREP; Event study; Exercise of discretion; Corporate governance;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:sjobre:v:76:y:2024:i:4:d:10.1007_s41471-024-00193-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.