Market Reaction to Restatements Attributed to Violations of Principles and Rules Based Accounting Standards

• In Event: 3. Earnings Information

Abstract

This study investigates how investors react to financial statement restatements
attributed to violations of principles and rules based standards. We find that
restatements attributed to violations of principles based standards experience more
profound negative market reactions than those attributed to violations of rules based
standards. Further analysis shows that violations of principle s based standards trigger
even more negative market reactions when firms report material internal control
weaknesses. The above findings are robust after controlling for the net income effect
of restatements , auditor industry specialization , institutional shareholding ,
irregularities, and potential endogeneity . Overall, this study provides evidence
indicating that investors perceive violations of principles-based standards as an important sign for uncertain financial reporting quality and potentially high litigation risk.
Keywords
: Principles based Standards; Rules based Standards; Restatements;
Internal Control Weakness; Market Reaction

Author

• Steve Wen-Jen Lin, University of Memphis