Differential Investors Response to Restatement Announcements: An Empirical Investigation

Sebahattin Demirkan () and Harlan Platt ()
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Sebahattin Demirkan: Morgan State University
Harlan Platt: Northeastern University

Journal of Economics and Financial Analysis, 2018, vol. 2, issue 2, 29-59

Abstract: When firms announce a restatement of their financial reports, they inform investors that their prior announcements were faulty. Not only do companies lose credibility at times such as this but also their securities are revalued as investors respond to the substance of the announcement. We investigate investor size to understand how large and small investors differ in their responses to restatement announcements. Our results indicate that large investors seemingly anticipate the announcement; their holdings decrease before restatement announcements; consequently large investors trading after announcements is less pronounced than for smaller investors. The response of small investors depends on who has prompted the restatement: the company itself, FASB or the SEC and not on the reason for the restatement such as problems with revenue recognition, restructuring or cost/expense. Large investor trading volume is affected by both the source of the restatement and the reason for it. Large investors seem to anticipate potential problems, and sell securities before restatement announcements.

Keywords: Restatement; Investor Size; Information; Trading Response; Prompters of restatement; Reasons of Restatements. (search for similar items in EconPapers)
JEL-codes: D40 D49 E44 F30 G15 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:trp:01jefa:jefa0017

DOI: 10.1991/jefa.v2i2.a17

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