Determinants of Market Reactions to Restatement Announcements

Abstract:     
We examine the market reaction to a sample of 403 restatement announcements made from 1995 to 1999. We find significantly negative average abnormal returns of about 9 percent over a two-day announcement window. We also document substantial variance in the abnormal returns. Our analysis indicates that more severe reactions are related to indications of management fraud, more material dollar effects and restatements that are attributed to auditors. We hypothesize that the negative signal associated with fraud and auditor-initiated restatements is associated with an increase in investors' expected monitoring costs, while higher materiality is associated with greater revisions of future performance expectations.

Number of Pages in PDF File: 38

Keywords: Restatement; Stock market reaction; Fraud; Audit; Auditor; SEC

JEL Classification: M41, G12, K22, M49

working papers series