An Operational Goal Programming Model of Mutual Fund Portfolio Determination

Credit-rating agencies have been criticized for not promptly adjusting credit rates following restatement announcements of financial statements. We investigate the link between restatements and credit risk. Our results indicate that restatement magnitude, duration, and the content of the restatement announcement impact the credit-rating response. Additionally, credit rating adjustments for firms making restatements after the Sarbanes-Oxley Act of 2002 provide evidence of the legislation's effectiveness. Our results also point to an Enron industry-peer effect as credit-rating agencies appear to punish oil, gas and energy restatement firms with significantly lower credit ratings in the post-Enron era. INTRODUCTION Restating previously issued financial statements should raise significant questions about the effectiveness of the restating firm's financial reporting. Credit-rating agencies have often been criticized for not responding promptly to the implied shift in the firm's riskiness related to the restatement of financial statements, especially after the Enron crisis. Restatements have differing levels of severity and a variety of characteristics which may provide information about the riskiness of the firm following the restatement. In this study, we investigate the link between restatements and credit risk. Initially, we consider a variety of characteristics and the level of severity in restatements in order to better understand the magnitude of the impact on credit risk of such restatements. We then consider the effect of restatements on credit ratings for the oil, gas and energy (OGE) sector to investigate the presence of an Enron industry-peer effect. The Enron debacle has played a vital role in alterations made to the process of assurance regarding the usefulness of financial information provided by public companies. The result was the issuance of the Sarbanes-Oxley (SOX) Act and the creation of the Public Company Auditing Oversight Board (PCAOB). One expectation of the stronger SOX law and oversight by the PCAOB is that restatements would be less common and of lower magnitude. Thus one way to consider the effectiveness of the post-Enron period and SOX regulation is to compare the characteristics of restatements pre-SOX and post-SOX. We consider the severity of restatements and various restatement characteristics in pre-SOX and post-SOX