Asymmetrical penalties for being late versus wrong: Investor reactions to accounting restatements and late filings

• In Event: Investor Judgment and Decision Making

Abstract

Annually, about ten percent of public firms experience an adverse filing event due to an accounting restatement or the inability to meet a filing deadline. Archival research has shown that capital markets penalize firms for adverse filing events and experimental research suggests that this penalty is caused by damaging investors’ trust in management. However, it is unclear whether firms are penalized differently for a restatement relative to a late filing and whether management may mitigate the damaging effects of the adverse filing event with an attribution strategy. We experimentally examine these issues and find that a late filing has a greater negative effect on investors’ perceptions of management trustworthiness relative to an accounting restatement. Specifically, the effect of a late filing on management trustworthiness is mediated by investors’ perceptions of performance risk. We also find that while an internal attribution ameliorates the negative effect of an accounting restatement on trustworthiness, neither an internal nor external attribution is effective at mitigating the negative effect of a late filing on trustworthiness. These findings contribute to understanding the effects of adverse filing events on investor decision-making and provide valuable insight regarding investors’ penalties for violating reliability versus timeliness of financial reporting.

Authors

• Lorenzo Patelli, University of Denver

• Lisa M Victoravich, University of Denver