After a Restatement: Long-Run Market and Investor Response
60 Pages Posted: 11 Sep 2008
Date Written: September 10, 2008
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.
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