Determinants of Investor Reactions to Error Announcements - Evidence from Germany

57 Pages Posted: 24 Mar 2015

See all articles by Germar Ebner

Germar Ebner

Handelshochschule Leipzig (HHL)

Matthias Hoeltken

Handelshochschule Leipzig (HHL) - Department of Accounting & Auditing

Henning Zülch

HHL Leipzig Graduate School of Management

Date Written: March 23, 2015

Abstract

This paper contributes to the understanding of the German two-tiered enforcement set-up. The first tier is represented by the private review panel FREP, which has been investigating IFRS financial statements since 2005 and ensures consistent and faithful application of the latter. The German securities regulator BaFin, as second tier to the mechanism, enforces disclosure of errors established by either FREP or BaFin and therefore substantiates the adverse disclosure mechanism. We investigate short-term reactions to error announcements published between 2006 and 2013 and find evidence for differences of investor reactions between the early and the current years of enforcement. Disentangling the contributing factors of error severity, we provide evidence that investor reaction is primarily associated with the impact of error announcements on profitability. In addition, we detect that the amount of errors established is negatively associated with investor reaction indicating that extensive error announcements have an attenuating effect on investor reaction. Yet we caution to blindly interpret these findings, since they are also subject to change over time and partially driven by outliers. Further multivariate analyses provide additional insights referring to determinants of investor reactions by examining effects of stated errors on core earnings, effects of errors triggered due to second-guessing the use of professional judgment, and changes of investor perception over time.

Keywords: Enforcement, IFRS, error announcement, regulation, Germany

JEL Classification: M41

Suggested Citation

Ebner, Germar and Hoeltken, Matthias and Zülch, Henning, Determinants of Investor Reactions to Error Announcements - Evidence from Germany (March 23, 2015). Available at SSRN: https://ssrn.com/abstract=2583667 or http://dx.doi.org/10.2139/ssrn.2583667

Germar Ebner (Contact Author)

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, 04109
Germany

Matthias Hoeltken

Handelshochschule Leipzig (HHL) - Department of Accounting & Auditing ( email )

Leipzig, D-04109
Germany

Henning Zülch

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, Saxony D-04109
Germany
+49(341)9851701 (Phone)
+49(341)9851702 (Fax)

HOME PAGE: http://www.hhl.de/faculty-research/faculty/accounting-auditing/

Register to save articles to
your library

Register

Paper statistics

Downloads
196
Abstract Views
869
rank
156,115
PlumX Metrics