Earnings Restatements, the Sarbanes-Oxley Act, and the Disciplining of Chief Financial Officers

Abstract

We investigate involuntary chief financial officer (CFO) turnover following earnings restatements, the labor market penalties imposed on former restatement-firm CFOs, and whether these disciplinary consequences have increased following the passage of the Sarbanes-Oxley Act of 2002 (SOX). Our results suggest that relative to a control group of non-restating firms, firms restating earnings have higher rates of involuntary CFO turnover, and that former restatement-firm CFOs face stiff labor market penalties. We generally find that the passage of SOX has not increased involuntary CFO turnover rates following restatements. However, we find that labor market penalties for former CFOs of restatement firms are more severe in the post-SOX period, suggesting that SOX has increased ex post settling-up costs. Our results suggest that the influence of SOX on the labor market has resulted in CFOs being held more accountable for their actions.