The Market Impact of Financial Restatements after Sarbanes-Oxley
This study analyzes the market price effect of financial restatements in a pre- versus post-SOX environment. Restatement of financials has long been an issue with investor groups and regulators alike. Since the advent of the Sarbanes-Oxley Act, we have seen a general increase in restatements and this has furthered to alarm these investor groups and regulators. Previous studies have analyzed predominantly pre-SOX effects of restatements on firm security prices, and have found the effects to be negligible. The studies that have attempted to assess the post-SOX security price effects have had limitations in years studied, numbers of firms, and robustness of models. This study overcomes many of these weaknesses by incorporating more study years (8 in each the pre- and post-SOX time periods), more firms (2,104 pre-SOX and 3,407 post-SOX firms), and greater robustness in the model (exclusion of overlapping announcements and tightening of the announcement window). Study results support prior pre-SOX studies that indicate minimal effect of financial restatements on security prices. However, the assessment of post-SOX firm restatements indicate that financial restatements have a significant downward effect on security prices, indicating that investors do perceive post-SOX financial restatements differently from those issued in pre-SOX time frames. The implication is that regulators and investor groups may be justified in their concern over the number of restatements subsequent to the passage of Sarbanes-Oxley. Although the vast bulk of the restatements do not result from misbehavior by management, there seems to exist a negative perception by stockholders of firms filing financial restatements. As a result, investors tend to bid down the market price of such firms. These results hold implications for all firms contemplating financial restatement.
