Non-Professional Investor Perceptions of Stealth Restatements and Qualitative Materiality: An Experimental Perspective

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Abstract

Companies are increasingly choosing disclose restatements via a stealth filing (waiting until the next period filing or filing an amended return) rather than disclosing the restatement through a more timely and transparent 8-K filing. This study experimentally examines non-professional investors’ perspectives regarding the materiality threshold that warrants an 8-K filing to disclose a restatement, as well as the role of quantitative and qualitative restatement materiality in their investment perceptions. We manipulate qualitative materiality across two levels (the result of managements’ intentional action or the result of a computational error). We find that while non-professional investors provide similar numerical materiality thresholds for misstatements that would influence their investment decision and warrant an 8-K filing, they indicate a desire to sell more shares if the restatement is material enough to influence their investment decision relative to restatements that would require an 8-K. We further find that non-professional investors express a significantly lower perception of the attractiveness of the investment based on consideration of investment materiality relative to 8-K materiality.Regarding our manipulation, we find that qualitative materiality influences non-professional investors’ perceptions regarding whether an 8-K should be filed, as well as the proportion of shares they wish to sell and the overall perceptions of the attractiveness of the investment.Finally, we find that the effect of qualitative materiality on perceived investment attractiveness is mediated by perceptions of management’s trustworthiness.Our findings inform the debate over the growing popularity of stealth restatements by suggesting that qualitative information plays an important role in the way non-professional investors view the materiality of a restatement as well as whether or not a stealth restatement is appropriate.

Authors

• Thomas Joseph Smith, Florida Atlantic University - Boca

• Lisa M. Victoravich, University of Denver