Accounting Restatements and Information Risk
50 Pages Posted: 9 Nov 2006 Last revised: 4 Mar 2010
Date Written: April 22, 2009
Abstract
We examine the association between accounting restatements and the pricing of information risk. Using the Fama and French three-factor model augmented with an information risk factor we find a significant increase in the factor loadings on the information risk factor for restatement firms after a restatement announcement. We find that the increase is related to the discretionary component of information risk and associated with the short-window price reaction to restatements. We study several potential determinants of the change in information risk pricing and find evidence consistent with the restatement reason, restatement initiator and number of times a firm restates affecting the change in the pricing of information risk. We also find an increase, of smaller magnitude, in the pricing of information risk for non-restatement firms in the same industries as the restatement firms consistent with an information transfer effect.
Keywords: restatements, information risk, earnings quality, cost of capital
JEL Classification: M41, G12
Suggested Citation: Suggested Citation
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