6. Changes in corporate governance
The results reported in the main analyses provide evidence that Basu-based conservatism metrics detect increases in
the conservatism of test companies’ earnings after overstatement periods. This may be due in part to improvements in
corporate governance. Prior research finds that outside directors on audit committees suffer high turnover and labor
market penalties following corrections of earnings overstatements (Srinivasan, 2005). Ahmed and Duellman (2007) argue
that conservatism is higher in companies with stronger boards of directors. This section investigates whether improve-
ments in restating companies’ corporate governance are associated with a detectable increase in conservatism.