The effect of restatements on trading volume reactions to earnings announcements
Journal
Review of Quantitative Finance and Accounting
Journal Volume
50
Journal Issue
1
Pages
129-180
Date Issued
2018
Author(s)
C. L. Ye
Abstract
This paper examines whether restatements affect trading volume reactions to subsequent earnings announcements. It closely follows the theoretical model developed by Kim and Verrecchia (J Account Econ 24:395–419, 1997) that decomposes the trading volume reactions around earnings announcements into the effects of pre-disclosure and event-period private information, and examines whether restatements change the trading volume reactions to earnings announcements in the post-restatement period. We find that restatements increase the degree of differential event-period information, leading to more divergent interpretation of earnings announcements subsequent to restatements. We also find that investors have less differential pre-disclosure private information in the post-restatement period, consistent with the view that investors’ beliefs converge when facing higher uncertainty in the information environment. Finally, focusing on irregularity restatement firms, we document that the effect of restatements on trading volume is more pronounced for firms announcing restatements after the passage of the Sarbanes–Oxley Act and after dismissing auditors and experiencing executive turnover. Overall, these results indicate that restatements affect investors’ behavior in forming judgments regarding earnings announcements.
SDGs
Type
journal article