The Effect of 10k Restatements on Firm Value, Information Asymmetries, and Investors' Reliance on Earnings

30 Pages Posted: 17 Oct 2002

See all articles by Kirsten L. Anderson

Kirsten L. Anderson

Georgetown University - Department of Accounting and Business Law

Teri Lombardi Yohn

Indiana University - Kelley School of Business - Department of Accounting

Date Written: September 2002

Abstract

Restating 10-Ks has become an increasingly common phenomenon in financial reporting. Restatements clearly signal that the firm's prior financial statements were not credible and were of relatively lower "quality". In this study, we examine the effect of restatements on investors' and dealers' perceptions of the firm. First, we examine the market returns and the bid-ask spread effects at the announcement of the accounting problem that leads to restatement. We find negative market returns for accounting problem announcements, and we find that the negative reaction is most pronounced for firms with revenue recognition issues. We also find an increase in spreads surrounding the announcement of revenue recognition problems. Second we examine returns and spreads from the announcement of the restatement to the filing of the restated financial statements. We find a significant negative market reaction and a larger negative reaction for firms with revenue recognition problems. We find no change in spreads from before the announcement of the accounting problem to after the restatement is filed. Finally, we examine the effect of the restatement on earnings response coefficients, and find that the market reacts less to earnings after a restatement than to earnings prior to a restatement. In general, these results indicate that investors and dealers react negatively to restatements and are more concerned with revenue recognition problems than with other financial reporting errors.

Keywords: accounting restatements, earnings quality, abnormal returns, information asymmetry, earnings response coefficients

JEL Classification: M41, M43, G12, D82

Suggested Citation

Anderson, Kirsten L. and Yohn, Teri Lombardi, The Effect of 10k Restatements on Firm Value, Information Asymmetries, and Investors' Reliance on Earnings (September 2002). Available at SSRN: https://ssrn.com/abstract=332380 or http://dx.doi.org/10.2139/ssrn.332380

Kirsten L. Anderson (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-3798 (Phone)
202-687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/kirsten-anderson

Teri Lombardi Yohn

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
(812) 855-0430 (Phone)

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