Flashcards in Determinants of market reactions to restatement announcements Deck (5)
What kind of restatements are associated with more negative returns? And why?
Restatements involving fraud and externally identiﬁed restatements.
They call into question management competence and integrity, which likely increases risk/uncertainty and may well decrease future company prospects.
Content of the restatement and returns.
Auditor attribution proxies for materiality when the initial announcement fails to quantify the misstatements. This provides evidence that the content of the restatement announcement affects returns, with a penalty imposed for missing information.
Uncertainty and returns.
Using a measure of analyst forecast dispersion as an alternative measure of increased uncertainty, we document a signiﬁcant increase in the dispersion at the time of the restatement announcement (for a reduced sample), and identify a negative correlation between the change and market reactions.
Material revisions and returns.
Restatements with more material revisions of future performance expectations (restatements that affect core earnings, with more negative changes in net income, affect more years and more accounts) are also associated with more negative reactions.
We also report an incrementally negative return when restatements change prior reports of net income to a loss.