Institutional Investors and Accounting Restatements

43 Pages Posted: 17 Sep 2004  

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

Nicole Thorne Jenkins

University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics

Juan Wang

Central Connecticut State University

Abstract

This paper examines how institutional investors respond to accounting restatements. We show that transient institutional investors, defined as institutions with shorter investment horizons and higher portfolio turnover, significantly reduce their holdings in a restating firm at least one quarter prior to the quarter of the restatement. This result holds after controlling for factors such as return momentum, unexpected earnings, size, book-to-market, and the portfolio weight of the firm to the institution. We find no evidence that other types of institutional investors adjust their holdings in advance of accounting restatements, although all types of institutions reduce their holdings after the restatement announcement. We also show that the market reaction to accounting restatements for firms with high institutional ownership is more strongly associated with diminished company prospects (measured as revisions in analyst forecasts) and increased uncertainty (measured as changes in forecast dispersion) relative to firms with low institutional ownership. Finally, after controlling for return momentum and firm size effects, we show that institutional investors trade earlier than individual investors within the restating quarter. Overall, our results suggest that the sophistication of institutional investors enables them to anticipate potential accounting problems and adjust their holdings downwards prior to the restatement.

Keywords: accounting restatements, institutional investors

JEL Classification: G23, G29, M41, M43

Suggested Citation

Hribar, Paul and Jenkins, Nicole Thorne and Wang, Juan, Institutional Investors and Accounting Restatements. AAA 2005 FARS Meeting Paper. Available at SSRN: https://ssrn.com/abstract=591743 or http://dx.doi.org/10.2139/ssrn.591743

Paul Hribar (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

Nicole Thorne Jenkins

University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics ( email )

Lexington, KY 40506
United States

Juan Wang

Central Connecticut State University ( email )

1615 Stanley Street
New Britian, CT 06050
United States

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