Do Investors See Through Mistakes in Reported Earnings?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday December 13, 2010 at 9:20 am
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Editor’s Note: The following post comes to us from Katsiaryna Salavei Bardos of the Finance Department at Fairfield University; Joseph Golec of the Finance Department at the University of Connecticut; and John Harding, Professor of Finance and Real Estate at the University of Connecticut.

In the paper Do Investors See Through Mistakes in Reported Earnings?, forthcoming in the Journal of Financial and Quantitative Analysis, we test whether investors see through mistakes in reported earnings by examining market reaction to initially reported erroneous earnings and valuation of restating firms during the error period, before earnings are corrected. We also examine the long-run return performance of restating companies in three periods: (1) the period prior to the mistake (pre-error period); (2) the period after the mistake has been made but before the restatement (error period); (3) and the period after the restatement (post-restatement period). We focus on the error period, which we split into four quartiles.

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