Investor Reaction to the Discovery of Accounting Fraud: The Period from the Discovery of the Fraud to the Completion of the Correction

Syed Raziuddin Ahmad, Nabil Ahmed Mareai Senan, Ijaz Ali, Kashif Ali, Imran Ahmad Khan and Asif Baig

Academic Journal of Interdisciplinary Studies, 2021, vol. 10

Abstract: This paper examines the period from the discovery of accounting fraud to the completion of correction and examines the reaction of investors on the date of the first news release suggesting accounting manipulation, the date of the subsequent release of information related to the amount of profit correction that was not disclosed on the date of the first news release, and the date of the submission of the correction report. The verification results show that the stock price falls sharply on the day of the first news release and the day when the information about the amount of profit revision is disclosed, that when the amount of profit revision is large and it takes time to disclose information about the amount of profit revision, there is a rebound in the stock price on the day when the correction report is submitted because investors like the resolution of uncertainty, and that there is a relationship between the amount of profit revision and the size of stock price decline. However, when there is no information about the amount of correction on the first day of the news release, investors react uniformly, and the reaction to a large (small) amount of correction is underreaction (overreaction). These results indicate that investors were misled by the misstatements until the fraud was discovered and made decisions based on overestimates of future cash flows, so they suffered unexpected losses when the fraud was discovered, and during the period from the fraud discovery to the completion of correction.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:bjz:ajisjr:2151

DOI: 10.36941/ajis-2021-0163

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