Risk Dynamics Around Restatement Announcements
Review of Quantitative Finance and Accounting, Forthcoming
61 Pages Posted: 27 Jan 2020
Date Written: May 4, 2019
We investigate the dynamic nature and temporal daily changes in systematic (beta), as well as idiosyncratic and total risk around restatement announcements. We find that beta increases by 51% at restatement announcement but it reverts to the pre-restatement level within one month. However, idiosyncratic risk experiences a longer-term increase of approximately 20% following a restatement. Cross-sectional analysis shows that the results are more pronounced for restatements associated with irregularity. Overall, our findings suggest that risk components are time-varying with the systematic component rapidly mean-reverting but the idiosyncratic component experiencing a longer-term increase.
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