Accounting restatements and information risk

Todd Kravet and Terry Shevlin ()
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Todd Kravet: University of Texas at Dallas
Terry Shevlin: Michael G. Foster School of Business, University of Washington

Review of Accounting Studies, 2010, vol. 15, issue 2, No 2, 264-294

Abstract: Abstract We examine the association between accounting restatements and the pricing of information risk. Using the Fama and French three-factor model augmented with discretionary and innate information risk factors, we find a significant increase in the factor loadings on the discretionary information risk factor for restatement firms after a restatement announcement. The increase in factor loadings results in an increase in the estimated cost of capital, which is cross-sectionally 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 initiator (auditor vs. firm management) and the number of times a firm restates affecting the change in the pricing of discretionary information risk. We also find an increase, of smaller magnitude, in the pricing of discretionary 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 (search for similar items in EconPapers)
JEL-codes: G12 M41 (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/s11142-009-9103-x

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