Recovering Investor Confidence After a Restatement

When a financial restatement is necessary, it is not surprising that investors will take some time to regain trust and give full credit to future earnings announcements.  A recent study, developed through a collaboration of professors from Singapore Management University and Boston College, suggests that the three quarter rebuilding period described in prior research may be understated.  The current study suggests a much longer duration of approximately three years for material restatements and a shorter duration of one quarter for other restatements.

More information, including a discussion of calculating damages resulting from an accounting restatement, is available in this related article.  Generally, an event study provides the basis for identifying movements that can attributed to specific events, including the notice of the restatement and any subsequent mitigation efforts, such as a resulting management or auditor change.  Event studies can illustrate how the public reacts (or fails to react) to a specific event. Identifying and measuring such activity can substantiate (or counter) a claim for economic damages.  In addition to tracking stock movements, a damages calculation may also include other consequences, such as increased cost of capital and executive turnover.

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