Ipo Valuation

Earnings Restatements: A Capital Market Perspective

Min Wu Department of Accounting, Taxation & Business Law New York University Leonard N. Stern School of Business 40 W. 4th Street, 4th Floor New York, NY 10012 Phone: (212) 998-0012 September 2002

This paper is derived from my doctoral dissertation. I am deeply indebted to my dissertation committee -- James Ohlson (chair), Baruch Lev, Eli Bartov, Aswath Damodaran, and William Greene -- for their guidance on this paper. I am grateful for the generous comments and suggestions from Professors Dan Gode, April Klein, Carol Marquardt, Partha Mohanram, Steve Ryan, and especially Paul Zarowin. My work has benefited tremendously from workshop participants at Emory University, Hong Kong University of Science and Technology, London Business School, Massachusetts Institute of Technology, New York University, the University of California at Los Angeles, the University of Michigan, etc. I would also like to thank the Arthur Andersen LLP Doctoral Dissertation Fellowship Foundation for its generous financial support.

Electronic copy available at: http://ssrn.com/abstract=1844265

ABSTRACT I investigate the stock-return behavior around earnings restatement announcements, the quantitative information and qualitative characteristics of restatements contributing to the shortterm abnormal returns, and the change in the investors’ confidence in the restating firms. Using hand-collected data from between 1977 and 2001, my work demonstrates that there is a sharp increase in the number of restatements from 1998 on. I find a strongly negative short-term market reaction to restatement announcements, a significant downward pattern in the six-month period leading up to the restatement announcements, and a negative postannouncement drift for up to four months. The study shows that both quantitative information (e.g., the amount of the earnings restatement) and qualitative characteristics of restatements carry significant...