The Effect of Regulatory Reforms on Institutional and Retail Investors: Evidence from Restatements before and after the Sarbanes-Oxley Act

41 Pages Posted: 14 Jan 2011 Last revised: 27 Feb 2012

See all articles by Bidisha Chakrabarty

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Ananth Seetharaman

Saint Louis University - Department of Accounting

Weimin Wang

Saint Louis University

Date Written: February 2012

Abstract

Regulators have expressed concern that the growing number of financial restatements, especially since the passage of the Sarbanes-Oxley Act of 2002 (SOX), confuse investors and erode confidence in the capital markets. Given the investor protection goal of SOX, of particular concern is the relative accuracy with which retail investors process and trade on the information contained in restatement announcements. In this paper, we propose a method to examine the accuracy of the trading behavior of retail and institutional investors conditioned upon accounting restatement announcements, both prior- and subsequent to the passage of SOX. We find that retail investors engaged in more inaccurate (i.e., potentially loss-making) trades in the post-SOX period than in the pre-SOX period. In contrast, the accuracy of institutional investors’ trades does not show any significant difference between the pre- and post-SOX regimes. Our evidence suggests that retail (but not institutional) investors process post-SOX restatements more inaccurately than pre-SOX restatements.

Keywords: Restatement, Sarbanes-Oxley, Retail and Institutional Investors

Suggested Citation

Chakrabarty, Bidisha and Seetharaman, Ananth and Wang, Weimin, The Effect of Regulatory Reforms on Institutional and Retail Investors: Evidence from Restatements before and after the Sarbanes-Oxley Act (February 2012). Available at SSRN: https://ssrn.com/abstract=1739884 or http://dx.doi.org/10.2139/ssrn.1739884

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
3149773607 (Phone)
3149771479 (Fax)

HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Ananth Seetharaman

Saint Louis University - Department of Accounting ( email )

3674 Lindell Blvd.
St. Louis, MO 63108
United States
314-977-2473 (Phone)
314-977-1473 (Fax)

Weimin Wang (Contact Author)

Saint Louis University ( email )

63103

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