Accounting Comparability, Investor Sophistication, and Contagion Effects

• In Event: Comparable Firms: Choice and Consequences

Abstract

We study investor sophistication regarding the implications of accounting comparability in the setting of peer firms’ earnings restatements. We argue that the impact of accounting comparability on financial markets depends crucially on the level of investor sophistication because assessing comparability and its capital market implications are non-trivial tasks. We find that higher comparability with respect to a peer restating firm triggers not only more negative price reactions around the peer firm’s restatement announcement but also a relatively large drift after the announcement. The initial price reaction (the subsequent drift) is solely attributable to timely large trades (delayed small trades). Short-sellers also act as if they understand the implications of accounting comparability.

Authors

• John L. Campbell, The University of Georgia

• Eric Yeung, Cornell University