The effect of restatements on analyst behavior

This paper examines how changes in the credibility of financial reporting affect analyst behavior. Using a sample of restatement firms experiencing a substantial change in credibility over 1997–2006, we document that restatements have a long‐lived effect on analyst behavior and that analysts differe...

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Bibliographic Details
Published inJournal of business finance & accounting Vol. 44; no. 7-8; pp. 986 - 1014
Main Authors Ye, Chunlai, Yu, Lin‐Hui
Format Journal Article
LanguageEnglish
Published Oxford Blackwell Publishing Ltd 01.07.2017
Subjects
Accounting irregularities
Accuracy
analyst behavior
analyst forecast
Analysts
Behavior
Companies
Credibility
Earnings
Financial reporting
Financial restatements
remedial actions
restatements
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Summary:This paper examines how changes in the credibility of financial reporting affect analyst behavior. Using a sample of restatement firms experiencing a substantial change in credibility over 1997–2006, we document that restatements have a long‐lived effect on analyst behavior and that analysts differentiate between restatements caused by irregularities and those caused by errors. We find that while irregularity restatement firms exhibit a reduction in analyst coverage and forecast accuracy and an increase in forecast dispersion in the post‐restatement period, other restatement firms exhibit only an increase in forecast error. Finally, we find evidence to suggest that remedial actions reduce the effect of irregularity restatements on analyst behavior. Overall, these results are consistent with the notion that restatements affect analyst behavior in forming judgements regarding subsequent earnings announcements.
ISSN:0306-686X
1468-5957
DOI:10.1111/jbfa.12255