The Association between Long-term Compensation and the Transparency of Restatement Disclosures
Regulations and related guidance regarding restatements have resulted in two basic disclosure methods: reissuances (Big “R”) and revisions (little “r”). A reissuance restatement requires an 8-K filing, whereas a revision restatement can be disclosed in less transparent ways. The high transparency of a reissuance restatement disclosure (8-K) results in greater likelihood of negative effects on companies, executives, and auditors (e.g., Plumlee and Yohn 2008; Burks 2010). The requirement for an 8-K filing involves judgment regarding materiality of the restatement, thus creating ambiguity as to the correct disclosure method. Such judgment also introduces the potential to opportunistically choose the restatement disclosure. We study the restatement disclosure choices of companies to examine if executive pay structure is associated with disclosure transparency. Using a sample of 1,178 restatements from the years 2004 through 2013, our results show that as the equity proportion of executive pay increases, the likelihood of a high transparency disclosure decreases. However, as the difference in pay structure between the CEO and CFO increases, the likelihood of a high transparency disclosure increases. Overall, our results suggest that executive pay structure influences disclosure choice and that pay structure difference between the CEO and CFO may mitigate such influence.