Information Asymmetries in the Context of Restatement Announcements

Information Asymmetries in the Context of Restatement Announcements

Pierangelo Rosati, Pietro Mazzola, Riccardo Palumbo
DOI: 10.4018/978-1-7998-2448-0.ch051
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This chapter presents the results of an empirical investigation on stock trading activity in the context of restatement announcements. The aim is to explore whether sophisticated investors may anticipate accounting restatements, and which factors lead their trading strategies. The empirical analysis shows that sophisticated investors sell before and buy after the announcement. Moreover sophisticated investors trade more when information asymmetry and event-related risk are higher, and do not care about stock's recent performance. In contrast, unsophisticated investors do not follow a particular trading strategy before or after the announcement, stay away from trading when the information gap (risk) is too wide (high), but trade more on stock with positive past performance. Results suggest that sophisticated investors are able to anticipate restatements and exploit their information advantage to speculate.
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Literature Review And Hypotheses

Recent accounting scandals have raised both regulators and financial community interest on accounting restatements. Unsurprisingly, the literature in this field has grown significantly in the last decade (Hribar & Jenkins, 2004; Badertscher et al., 2011).

Existing studies agree on negative consequences of restatements and deeply investigated their causes and consequences. Using a relatively small sample (73 US restating companies from 1976 to 1985), Kinney and McDaniel (1989) showed that restating companies present lower returns and higher leverage; subsequently lots of effort has been dedicated to measure the market reaction and to identify event’s features which could amplify or mitigate such an impact. Change in equity value is typically quantified in terms of abnormal returns in order to avoid the influence of market trend; previous studies show that restating companies lose about 10 percent of their market value within two days following a restatement announcement (Dechow, Sloan, & Sweeney, 1996; GAO, 2003; Wilson, 2008; Kravet & Shevlin, 2010; Burks, 2011). Furthermore, some characteristics of restatements may exacerbate such a negative reaction. If a restatement:

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