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Article
Do investors see through mistakes in reported earnings?
Journal of Financial and Quantitative Analysis
  • Katsiaryna Salavei Bardos, Fairfield University
  • Joseph H. Golec, University of Connecticut
  • John P. Harding, University of Connecticut
Document Type
Article
Article Version
Publisher's PDF
Publication Date
12-1-2011
Disciplines
Abstract

This study investigates whether investors see through materially misstated earnings, and whether they anticipate earnings restatements. For firms that restate at least one annual report, we find that investors are misled by mistakes in reported earnings at the time of initial earnings announcements. Investors react positively to the component of the favorable earnings surprise that will subsequently be restated, and attach the same valuation to it as to the true earnings surprise. We also find that investors anticipate the subsequent downward restatements and start marking stock prices down several months before a restatement announcement, so that the full impact of a restatement is about three times as large as the initial announcement effect. Overall our findings indicate that although investors anticipate restatements several months before its announcement, they are misled by misstated earnings for several years and therefore would benefit from better quality of financial information.

Comments

Copyright © Michael G. Foster School of Business, University of Washington 2011. Publisher’s version is available at:

http://journals.cambridge.org/action/displayJournal?jid=JFQ

Published Citation
Bardos, Katsiaryna Salavei, Joseph H. Golec, and John P. Harding. Dec. 2011. Do investors see through mistakes in reported earnings? Journal of Financial and Quantitative Analysis, 46 (6) p. 1917-1946
DOI
10.1017/S0022109011000470
None
Peer Reviewed
Citation Information
Katsiaryna Salavei Bardos, Joseph H. Golec and John P. Harding. "Do investors see through mistakes in reported earnings?" Journal of Financial and Quantitative Analysis Vol. 46 Iss. 6 (2011)
Available at: http://works.bepress.com/katsiaryna_salaveibardos/2/