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| Title: | Accounting Restatements: Are They Always Bad News for Investors? |
| Authors: | Callen, Jeffrey L.
Livnat, Joshua
Segal, Dan |
| Issue Date: | 10-Nov-2005 |
| Series/Report no.: | Joshua Livnat-04 |
| Abstract: | This study investigates a large sample of financial statement
restatements over the period 1986-2001, and compares restatements caused
by changes in accounting principles to those caused by errors.
Typically, investors perceive restatements as negative signals due to
three potential reasons: (i) the restatement indicates problems with the
accounting system that may be manifestations of broader operational (and
managerial) problems, (ii) the restatement causes downward revisions in
future cash flows expectations, and (iii) the restatement indicates
managerial attempts to cover up income decline through “cooking
the books”. We provide evidence that market reactions to
restatements due to errors are generally negative. We show that these
restatements come in periods of declining profits and lower profits than
industry peers for the restating firms, consistent with both
opportunistic managerial behavior and operational problems. However,
investors’ reactions to income-increasing restatements due to
errors are not different from zero, suggesting that the perceived
failure of the accounting system is just offset by the upward revisions
in future cash flow expectations in these cases of income-increasing
errors. Thus, our combined results show that not all restatements are
alike; users of the information need to carefully assess the existence
and potential effects of the three factors that typically cause the
downward revisions in stock prices on a case by case basis. |
| URI: | http://hdl.handle.net/2451/27575 |
| Appears in Collections: | Accounting Working Papers
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