Earnings Quality and Investor Reaction to Restatement Announcements

Authors

  • Robin N. Romanus Appalachian State University

Keywords:

restatements, market reaction, earnings quality

Abstract

The purpose of this research is to help clarify the ambiguity surrounding market participants’ pricing of earnings quality using one clearly observable indicator of low-quality earnings, accounting restatements. This study examines the effect pre-restatement earnings quality has on short-window returns following restatement announcements using a cross-section of 719 publicly traded firms that announced restatements between 1997 and 2004.  Accrual metrics are used to proxy for earnings quality.  Results indicate that the market reaction to restatement announcements is significantly influenced by pre-restatement earnings quality.  Specifically, the accrual measure of earnings quality is significantly and negatively related to the market reaction. This finding provides evidence that investors are attune to implications for poor earnings quality communicated by accruals quality and that this awareness is reflected in stock prices prior to the announcement of a clearly observable measure of poor earnings quality, accounting restatements.

Author Biography

Robin N. Romanus, Appalachian State University

Dr. Robin Romanus is an Assistant Professor of Accounting at Appalachian State University.  Her reserach interests include the causes and consequences of financial restatements, and audity quality.  She has published in Accounting Horizons, Review of Accounting and Finance, Issues in Accounitng Education, The Journal of Theoretical Accoutning Research and Oil, Gas & Energy Quarterly.

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Published

2019-12-04

Issue

Vol. 9 No. 1 (2019)

Section

ABR Journal Articles

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