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Informed Trading and the Market Reaction to Accounting Restatements

The Accounting Review, Forthcoming

Posted: 16 Nov 2010 Last revised: 22 Aug 2013

Brad A. Badertscher

University of Notre Dame

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

Nicole Thorne Jenkins

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

Date Written: October 15, 2010

Abstract

We examine how informed trading activities affect the market reaction to accounting restatements. We find significantly less negative reactions to accounting estatements when managers are net purchasers of stock before the restatement, and significantly more negative market reactions when managers are net sellers. Similar patterns characterize corporate trading, where prior stock repurchases dampen negative reactions and prior equity issuances increase negative reactions to the restatement. We address the possibility of reverse causality in which informed trades are undertaken because of the expected market reaction by examining the difference between disclosed and non-disclosed trades, finding that the market reaction is concentrated in the disclosed trades. Our results are incremental to general return patterns associated with insider trading and corporate equity transactions, and hold after controlling for other determinants of the market reaction to restatements.Taken together, these findings suggest that investors use informed trading activities to help interpret and price accounting restatements.

Keywords: information risk, restatements, insider trading, repurchases

JEL Classification: M41, M42

Suggested Citation

Badertscher, Brad A. and Hribar, Paul and Jenkins, Nicole Thorne, Informed Trading and the Market Reaction to Accounting Restatements (October 15, 2010). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1709611

Brad A. Badertscher

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Paul Hribar

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

Nicole Thorne Jenkins (Contact Author)

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

Lexington, KY 40506
United States

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