Predicting income-decreasing forced financial restatement

Abstract

This study explored the varied characteristics of misstatement firms, which serve as the foundation to develop a model that predicts income-decreasing forced restatement (IDFR). Multivariate logit regression was performed on 4,698 firm-years of Malaysian listed firms from 2002 to 2012. The results were tested for robustness using a stepwise logit model and a penalised likelihood logit model. Several factors, such as share price volatility, independent board of directors, company's internal fund, and political connection, emerged as the main predictors for IDFR. This study proposes a prediction model that synthesises financial and non-financial aspects in terms of scaled probability (F-score), which may function as a red flag of income-increasing misstatement firms that warrant further investigation.