Riding a Tiger without Being Eaten - RePub - Erasmus Universiteit ...

Bailey (2001). Also, restatements related to fraudulent activity and that affect core
accounts, cause the greatest stock price declines (Palmrose et al., 2004; Anderson
& Yohn, 2002; Owers et al., 2002) (see Figure 1.3). In a draft paper by Barniv and Cao
(2006) the authors develop a theoretical framework to gauge investor reactions
on restatement announcements, based not only on subsequent analysts’ revisions
in earnings forecasts, but also including the level of information innovation and
analyst characteristics. They find that high-innovation level restatements, defined as
forecasts that are both above the analysts’ prior forecasts and above the consensus
forecast, trigger a stronger immediate price response. They confirm earlier research
that documents containing forecasts by reputable analysts (All-Stars by Zacks, and/
or StarMine, a Thomson-Reuters subsidiary), are on average more accurate compared
to those of unranked analysts. Their study confirms the importance of analysts as
‘reputational intermediaries’ in an era in which restatements have proliferated and
analysts’ judgments are under scrutiny by investors (see Figure 1.2).
In summary, a number of studies covering different restatement periods, have
estimated the impact of restatement announcements on market capitalization,
estimating average negative declines of 4.2 per cent (Agrawal & Chadha, 2005), and
negative 9 per cent (Palmrose et al., 2004) when using a two-day window surrounding
the restatement announcement; negative 9.5 per cent (GAO 2002 report), and
negative 11 per cent (Richardson et al., 2002) using a three-day window; and negative
13.4 per cent using a seven-day window (Anderson & Yohn, 2002). Cheng and Chung
(2006) document post-announcement drift subsequent to restatements. They find
an average buy-and-hold abnormal return of negative 34 per cent over the 36-month
horizon for a sample of restating companies. They did not, however, examine the
determinants of the under reaction.
Another study, conducted by Professors John Graham of Duke University, Si Li of
Wilfred Laurier University and Jiaping Qiu of McMaster University (2008), looked at
data from a GAO database of 919 restatements announced by 800 public companies
between January 1997 and June 2002. They then combed through a database
maintained by Loan Pricing Corp., which collects data on commercial loans made to
both United States and foreign corporations.
They found that the subsequent loan spreads for companies that made restatements,
Chapter 1 - Introduction and Historical Overview
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