Material Weakness Disclosures and Restatement Announcements

51 Pages Posted: 17 Dec 2014

See all articles by Nader Wans

Nader Wans

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Li He

Southwestern University of Finance and Economics (SWUFE) - School of Accountancy

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Date Written: December 15, 2014

Abstract

We examine the joint pricing effects of restatement announcements and associated MW disclosures. First, we analyze whether a dual disclosure of both a MW and restatement is viewed more adversely by the market at the time of restatement. We show that firms that announce both a restatement and an associated MW, either before, concurrent with, or after the restatement experience significantly more negative returns and a higher increase of implied volatility than do firms whose restatements were not associated with an MW disclosure. We also find that the joint disclosure of a MW and restatement triggers more class action lawsuits than does a single disclosure of a MW. Second, we examine the PCAOB’s premise that MW disclosures are warnings of potential financial misstatements by examining the market reaction to restatements conditional on prior MW disclosures. Our evidence suggests that the market reacts more negatively to restatements that are preceded by a MW disclosure compared to restatements that went unwarned. Overall, our study provides new insights on how capital market participants incorporate information about internal control quality into their perceptions about financial reporting quality.

Suggested Citation

Wans, Nader and He, Li and Sarath, Bharat Sarrukai, Material Weakness Disclosures and Restatement Announcements (December 15, 2014). 2015 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=2538934 or http://dx.doi.org/10.2139/ssrn.2538934

Nader Wans (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada

Li He

Southwestern University of Finance and Economics (SWUFE) - School of Accountancy ( email )

55 Guanghuacun St
Sichuan, 610072
China

Bharat Sarrukai Sarath

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

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