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Do Investors See Through Mistakes in Reported Earnings?

50 Pages Posted: 13 Feb 2008 Last revised: 6 Oct 2010

Katsiaryna Salavei Bardos

Fairfield University - Department of Finance

Joseph H. Golec

University of Connecticut - Department of Finance

John P. Harding

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies

Date Written: May 14, 2010

Abstract

This study investigates whether investors see through materially misstated earnings, and whether they anticipate earnings restatements. For firms that restate at least one annual report, we find that investors are misled by mistakes in reported earnings at the time of initial earnings announcements. Investors react positively to the component of the favorable earnings surprise that will subsequently be restated, and attach the same valuation to it as to the true earnings surprise. We also find that investors anticipate the subsequent downward restatements and start marking stock prices down several months before a restatement announcement, so that the full impact of a restatement is about three times as large as the initial announcement effect. Overall our findings indicate that although investors anticipate restatements several months before its announcement, they are misled by misstated earnings for several years and therefore would benefit from better quality of financial information.

Keywords: restatements, earnings, valuation, long-run event study, corporate misreporting, valuation

JEL Classification: G14, G30

Suggested Citation

Bardos, Katsiaryna Salavei and Golec, Joseph H. and Harding, John P., Do Investors See Through Mistakes in Reported Earnings? (May 14, 2010). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1092256

Katsiaryna Salavei Bardos (Contact Author)

Fairfield University - Department of Finance ( email )

Dolan School of Business
1073 North Benson Road
Fairfield, CT 06824
United States

Joseph Golec

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

John P. Harding

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies ( email )

2100 Hillside Road
Unit 1041RE
Storrs, CT 06269-2041
United States
860-486-3227 (Phone)
860-486-0349 (Fax)

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