The Contagion Effects of Accounting Restatements

Posted: 19 Aug 2007  

Cristi A. Gleason

University of Iowa - Department of Accounting

Nicole Thorne Jenkins

University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics

W. Bruce Johnson

University of Iowa - Department of Accounting

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Abstract

We predict and find that accounting restatements that adversely affect shareholder wealth at the restating firm also induce share price declines among non-restating firms in the same industry. These share price declines are unrelated to changes in analysts' earnings forecasts, but instead seem to reflect investors' accounting quality concerns. Peer firms with high industry-adjusted accruals experience a more pronounced share price decline than do low accrual firms. This accounting contagion effect is concentrated among revenue restatements by relatively large firms in the industry. We also find that investors impose a larger penalty on the stock prices of peer firms with high earnings and high accruals when peer and restating firms use the same external auditor. Our results are consistent with the notion that some accounting restatements cause investors to reassess the financial statement information previously released by non-restating firms.

Keywords: Accounting Quality, Contagion, Earnings Quality, Information Transfer

JEL Classification: G34, D80, M41, M43, G12

Suggested Citation

Gleason, Cristi A. and Jenkins, Nicole Thorne and Johnson, W. Bruce, The Contagion Effects of Accounting Restatements. Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1006848

Cristi A. Gleason (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

Nicole Thorne Jenkins

University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics ( email )

Lexington, KY 40506
United States

W. Bruce Johnson

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-1048 (Phone)
319-335-1956 (Fax)

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