What is it about?
When a company restates its financial statements, it acknowledges that previously reported financial information needs to be corrected. While investors may react immediately to a restatement announcement, its effects on stock performance can continue much longer. This study examines the stock performance of U.S. firms for one to five years after they announce financial restatements. We find that firms issuing restatements significantly underperform comparable firms over the long run. The underperformance is particularly evident among large firms and varies depending on the circumstances that led to the restatement.
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Why is it important?
Financial restatements can raise concerns about the reliability of a company's previously reported financial information and may have consequences for investors well beyond the initial announcement. Our findings show that firms issuing restatements experience significant long-run stock underperformance relative to comparable firms matched by industry, size, and book-to-market characteristics. The negative performance is driven primarily by large firms and is more pronounced for self-prompted restatements and those involving improper revenue accounting. These findings provide useful insights into the long-term consequences of financial restatements and how investors respond to different types of restatements.
Perspectives
The motivation for this study came from recognizing that the consequences of financial restatements may extend well beyond investors' immediate reaction to the announcement. We wanted to examine whether firms that restate their financial statements continue to experience abnormal stock performance over longer periods and whether that performance differs according to firm and restatement characteristics. Our findings show significant long-run underperformance, particularly among large firms, and indicate that the nature of the restatement also matters. I hope this study contributes to a better understanding of the long-term effects of financial restatements and provides useful evidence for investors and researchers evaluating the consequences of financial reporting problems.
Dr. Hongbok Lee
Western Illinois University
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This page is a summary of: Long-run equity performance of firms that restate financial statements, Managerial Finance, November 2019, Emerald,
DOI: 10.1108/mf-05-2019-0247.
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