Article2006

Intra‐Industry Effects of Earnings Restatements Due to Accounting Irregularities

Tan Xu · Mohammad Najand · Douglas E. Ziegenfuss

90 citations0/0 files storedJournal of Business Finance &amp Accounting

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Corporate Governance and Financial Management

Abstract

Abstract: This paper investigates the intra‐industry effects of earnings restatements due to accounting irregularities. We detect a significant contagion effect for rival firms whose cash flow characteristics are similar to those of the restating firm. The restatement doesn't seem to influence all the firms in the industry or firms that have a high probability of involving the same type of accounting irregularity as the restating firm does. We do not detect any competitive effect; nor do we find a significant change in the implied cost of equity capital of the rival firms, suggesting that the contagion effect is due to the revision in the expected short‐run future earnings of the rival firms.

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References

2001Toward an Implied Cost of Capital 2003Determinants of market reactions to restatement announcements 1983Horizontal mergers, collusion, and stockholder wealth 1992Contagion and competitive intra-industry effects of bankruptcy announcements 2003Inferring the Cost of Capital Using the Ohlson–Juettner Model 2003What's My Line? A Comparison of Industry Classification Schemes for Capital Market Research 2004The Effect of Accounting Restatements on Earnings Revisions and the Estimated Cost of Capital 1993Long-Term Market Overreaction or Biases in Computed Returns?

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