The Informational Content And Valuation Ramifications Of Earnings Restatements

Abstract

This paper analyzes the market responses to different categories of accounting restatements.  Accounting restatements have been occurring with increasing frequency in recent years, generating significant discussion as to their causes and consequences.  We examine both of these dimensions of restatements.  We identify 9 categories into which restatements can be classified.  When examining their valuation consequences, we find statistically significant negative revaluations for the overall sample. However, there is substantial variation in valuation changes across the various categories of restatements.  Investors react the most negatively to restatements resulting from accounting issues (i.e. errors/irregularities/method-changes).  This is greatly magnified when there is a contemporaneous change in the firm’s CEO.  At the other end of the spectrum, we find positive reactions to restatements that reflect and provide the accounting calibration of previously announced settlements of legal issues.  A notable feature of the findings is that for some categories there are valuation changes in response to accounting restatements which are seemingly just recording the implications of previously announced corporate happenings.  In the context of efficient market perspectives, some of these changes at the time of the restatement announcement itself are somewhat surprising.