Earnings Restatements: A Capital Market Perspective

54 Pages Posted: 24 May 2011  

Min Wu

Morgan Stanley

Date Written: September 16, 2002

Abstract

I investigate the stock-return behavior around earnings restatement announcements, the quantitative information and qualitative characteristics of restatements contributing to the short-term abnormal returns, and the change in the investors’ confidence in the restating firms. Using hand-collected data from between 1977 and 2001, my work demonstrates that there is a sharp increase in the number of restatements from 1998 on. I find a strongly negative short-term market reaction to restatement announcements, a significant downward pattern in the six-month period leading up to the restatement announcements, and a negative post-announcement drift for up to four months. The study shows that both quantitative information (e.g., the amount of the earnings restatement) and qualitative characteristics of restatements carry significant explanatory power for the short-term market response. Finally, the research shows that the investor-perceived earnings quality deteriorates after the restatement announcement in terms of a decrease in earnings response coefficients from those before the restatement announcements, which implies that investors lose confidence in restating firms. At least before Enron, however, this negative confidence effect did not spill over to companies with similar characteristics.

Keywords: Earnings restatements, stock returns, ERC, event study

JEL Classification: M41, G10, G14

Suggested Citation

Wu, Min, Earnings Restatements: A Capital Market Perspective (September 16, 2002). Available at SSRN: https://ssrn.com/abstract=1844265 or http://dx.doi.org/10.2139/ssrn.1844265

Min Wu (Contact Author)

Morgan Stanley ( email )

Hong Kong

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