Informed Trading and the Market Reaction to Accounting Restatements
University of Notre Dame
University of Iowa - Henry B. Tippie College of Business
Nicole Thorne Jenkins
University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics
October 15, 2010
The Accounting Review, Forthcoming
We examine how informed trading activities affect the market reaction to accounting restatements. We find significantly less negative reactions to accounting estatements when managers are net purchasers of stock before the restatement, and significantly more negative market reactions when managers are net sellers. Similar patterns characterize corporate trading, where prior stock repurchases dampen negative reactions and prior equity issuances increase negative reactions to the restatement. We address the possibility of reverse causality in which informed trades are undertaken because of the expected market reaction by examining the difference between disclosed and non-disclosed trades, finding that the market reaction is concentrated in the disclosed trades. Our results are incremental to general return patterns associated with insider trading and corporate equity transactions, and hold after controlling for other determinants of the market reaction to restatements.Taken together, these findings suggest that investors use informed trading activities to help interpret and price accounting restatements.
Keywords: information risk, restatements, insider trading, repurchases
JEL Classification: M41, M42Accepted Paper Series
Date posted: November 16, 2010 ; Last revised: February 8, 2012
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