Our paper extends the literature on the relation between corporate governance and earnings management in two ways. First, unlike earnings management, which most firms might engage in routinely to varying degrees, a misstatement of earnings is a rare and serious event in the life of a company. As Zoe-Vonna Palmrose and Susan Scholz point out, a restatement can trigger an SEC investigation, lead to replacement of top executives, and result in the firm being significantly penalized by Many restating firms subsequently end up in bankruptcy. Second, the measurement of earnings management is an academic construct; there is no “smoking gun” that shows that earnings were indeed manipulated by managers
