Discretionary Disclosure and the Market Reaction to Restatements
48 Pages Posted: 18 Sep 2006 Last revised: 12 Dec 2011
Date Written: August 3, 2011
This paper presents evidence that management’s disclosure choices prior to a restatement are associated with the market reaction at the time the restatement is announced. The two aspects of pre-restatement disclosure choice we examine are the amount of disclosure, hypothesized to reduce information asymmetries, and the tone of disclosure, hypothesized to exacerbate the effect of subsequently-disconfirmed market expectations. Our results provide support for both hypothesized effects, controlling for characteristics that previous research has shown to affect market reaction to restatements – financial attributes of restatements, and concurrent disclosure choices such as prominence of the announcement. We also find that concurrent and prior disclosure characteristics have equivalent and complementary power in explaining market reaction to restatements, while interactive effects indicate that pre-restatement disclosure choices reduce the marginal market impact of concurrent disclosure characteristics.
Keywords: Restatement, Tone, Discretionary Disclosure, Fraud
JEL Classification: G14
Suggested Citation: Suggested Citation