Prospect Theory, Mental Accounting, and Timing of Restatement Disclosure

• In Event: Breakfast with Research Roundtable Forum Session
  In Paper Session: Roundtable 3: Financial Accounting II

Abstract

Accounting restatement is a form of information disclosure that is often income decreasing in nature and consequently causes negative market reactions. Research on restatement disclosure has generated significant findings on determinants and consequences of restatement disclosure choices. This paper adds to the restatement disclosure literature by investigating the timing of restatement disclosure through the lens of prospect theory and mental accounting theory. The findings suggest that timing (or not) the restatement announcement on the same day as the periodic filing provides a significant alternative explanation for the market reaction to restatement announcements, when firm characteristics and restatement characteristics are controlled. The findings also provide evidence for the argument that management is actively managing the timing of restatement disclosure.

Authors

• Qiongyao Zhang, Robert Morris University

• Chenchen Huang, State University of New York - Buffalo State