Long-run equity performance of firms that restate financial statements. Issue 1 (18th November 2019)

• Record Type: Journal Article
• Authors: Moon, Gisung; Lee, Hongbok; Waggle, Doug
• Is Part Of: Managerial finance. Volume 46:Issue 1(2020)
• Page Start: 92
• Page End: 108
• Publication Date: 2019-11-18
• Subjects: Financial statements -- Restatements -- Long-run performance -- Buy-and-hold abnormal returns -- Three-factor model -- Four-factor model; G10 -- G11; Corporations -- Finance -- Periodicals; Business enterprises -- Finance -- Periodicals; 658.1505
• DOI: 10.1108/MF-05-2019-0247
• Languages: English
• ISSNs: 0307-4358

Abstract

Abstract : Purpose: The authors investigate how the stock market reacts to financial restatements using the restatements data from the United States Government Accountability Office (GAO-06-678). In particular, the purpose of this paper is to examine the long-run equity performance of the restating firms, for holding periods of one to five years after the announcements of restatements. Design/methodology/approach: This paper measures the long-run stock performance of restating firms with the buy-and-hold abnormal returns and time-series regression analyses based on Fama–French's (1993) three-factor model and Carhart's (1997) four-factor model. Findings: The authors find that restating firms significantly underperform in the long run compared with their peers matched by industry, size and book-to-market. Restating firms' underperformance is confirmed with time-series regression analyses based on Fama–French's (1993) three-factor model and Carhart's (1997) four-factor model. Further, the authors find the negative long-run abnormal performance of restating firms is primarily driven by large firms. The authors also report that self-prompted restatements and improper revenue accounting-triggered restatements result in worse long-run abnormal performance. Originality/value: This paper is the first paper that thoroughly investigates the long-run stock returns of the firms that restate financial statements by fully considering the size effect.