Lecture: After a Restatement: Long-Run Market and Investor Response

Fri., Mar 28, 2008 - Time: 1:30 - 3:00pm

Dr. Devin Shanthikumar. Assistant Professor at the Harvard Business School, will be the guest speaker at this week's Finance Seminar. All are invited to attend.

Topic: After a Restatement: Long-Run Market and Investor Response

Abstract:
Examining returns and institutional trading in a long window surrounding earnings restatements, we show that abnormal returns following negative restatement announcements, which, on average, are accompanied by negative pre-announcement and announcement-period returns, are significantly positive. In particular, we find significant positive returns in the six months following the announcement, using raw returns, 3- and 4-factor calendar-time abnormal returns, firm-specific 4-factor adjusted returns, and characteristic-adjusted returns. Results suggest that these positive returns are not due to a change in traditional risk factors or cost of capital. Linking the restatements to analyst forecasts, we find that analyst forecast dispersion increases around the restatement and then decreases in the 3-6 months after the restatement, while analyst forecasts do not become overly negative or subsequently drift upwards, suggesting
that the return pattern is driven by restatement-period increases in information risk and uncertainty, which subsequently resolve, but not by overall investor overreaction to the negative news. Given the potential variation in investors’ willingness to tolerate information risk and uncertainty, we also examine institutional ownership changes. We find that dedicated institutions sell restatement firm shares in the quarters before and after the announcement, while transient and quasi-indexing institutions sell before the restatement announcement and then buy significantly in the months after the announcement. The event-time trading of dedicated institutions has weakly positive predictive ability for future returns, meaning that the firms for which dedicated institutions maintain or buy shares, around the restatement announcement, experience the most positive returns post-announcement. The event-time trading of transient and quasi-indexing institutions has weakly negative predictive ability. The differences in the returns predicted by the three groups’ trading are statistically and economically significant. Together, the results suggest that transient and quasi-indexing institutions are less willing to tolerate the increase in information risk immediately surrounding a restatement, and help drive a strong negative price reaction to the initial announcement, along with a later recovery in stock price.

Click here to learn more about Dr. Devin Shanthikumar.

Click here to learn more about the Finance Seminar Series.

Location: SOM 210 (wheelchair accessible)

Contact Information

Tom O'Brien
(413) 545-5581
tobrien@som.umass.edu