Litigation Risk and Market Reaction to Restatements

45 Pages Posted: 14 Nov 2009 Last revised: 28 Mar 2013

See all articles by Katsiaryna Bardos

Katsiaryna Bardos

Fairfield University

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: March 2, 2009

Abstract

A large negative stock price reaction to a restatement announcement could imply a particularly significant accounting error, or one made by a firm that has a relatively high probability of being sued. This paper investigates the extent to which market reactions to restatement announcements are explained by litigation risk. We model the simultaneous relationship between restatement announcement abnormal returns and litigation risk and find that about half of the -9.2 percent average restatement announcement effect is due to expected litigation costs. We also find that the significance of the accounting error does not directly affect the magnitude of the abnormal return; it only affects abnormal return indirectly because it increases the probability of being sued.

Suggested Citation

Bardos, Katsiaryna and Golec, Joseph and Harding, John P., Litigation Risk and Market Reaction to Restatements (March 2, 2009). Journal of Financial Research, Vol. 36, No. 1, 2013, Available at SSRN: https://ssrn.com/abstract=1505119 or http://dx.doi.org/10.2139/ssrn.1505119

Katsiaryna Bardos (Contact Author)

Fairfield University ( 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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