After a Restatement: Long-Run Market and Investor Response

60 Pages Posted: 11 Sep 2008

See all articles by Laura Frieder

Laura Frieder

Purdue University - Krannert School of Management

Devin M. Shanthikumar

University of California, Irvine - Paul Merage School of Business

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Date Written: September 10, 2008

Abstract

We find positive returns 3-6 months after negative restatement announcements. Results suggest these returns are not due to traditional risk factors or changes in traditional risk factors or cost of capital. Analyst forecast dispersion increases around the announcement and decreases 3-6 months after, consistent with an initial increase and subsequent decrease in firm-specific uncertainty and information risk. Analyst forecast errors do not become overly negative or subsequently drift upwards, inconsistent with investor overreaction. Transient and quasi-indexing institutions sell before the announcement but buy after, and the event-time trading of dedicated (transient and quasi-indexing) institutions has positive (negative) predictive ability for future returns. Together, results suggest transient and quasi-indexing institutions are less willing to tolerate information risk and uncertainty, helping drive a strong negative reaction and later recovery.

Suggested Citation

Frieder, Laura and Shanthikumar, Devin M., After a Restatement: Long-Run Market and Investor Response (September 10, 2008). Available at SSRN: https://ssrn.com/abstract=1266367 or http://dx.doi.org/10.2139/ssrn.1266367

Laura Frieder

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Devin M. Shanthikumar (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
SB2 428
Irvine, CA 92697-3125
United States

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