Does Stock Price Contagion Reflect the Information in Earnings Management Contagion?
John L. Campbell
University of Georgia - J.M. Tull School of Accounting
P. Eric Yeung
Cornell University - Samuel Curtis Johnson Graduate School of Management
October 1, 2013
Recent studies document that earnings management appears to be common across firms that share similar industry membership, corporate governance, or geography (i.e., “earnings management contagion”). We examine alternative financial statement signals of earnings management contagion and test whether investors understand their information content using the setting of earnings restatement announcements. We find that a measure based on accounting comparability with the restating firms outperforms accruals-based measures in detecting earning management contagion. In addition, we find that, similar to the stock price of the restating firm, stock prices of firms whose accounting is comparable to the restating firm also decline in response to the restatement announcement. Further evidence shows that large traders and short-sellers react in a timely manner, and their trades trigger an immediate negative price reaction. Small traders behave inattentively, and their herding-driven delayed trades contribute to a negative drift in prices.
Number of Pages in PDF File: 45working papers series
Date posted: December 2, 2011 ; Last revised: October 31, 2013
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