The Market Reaction to Liquidity: Evidence from Restating Firms

• In Event: Financial Accounting and Reporting 9

Abstract

This paper investigates how restatement of previous financial results affects liquidity measured in various measure of spread surrounding the announcement day, using a sample of restating firms in each year from Jan, 2002 to Feb, 2005. The spreads measured in cents fail to detect an abnormality in liquidity due to a general downward trend in the spreads during the period. When measured in percentage term, however, the proportional spreads indeed deteriorate on the announcement date. Dividing the period into three sub-periods, we find virtually all declines in liquidity come from the pre-SOX period, which conversely explains that, no significant change in liquidity in the post-Sox period. In every sub-period, a volume shock is observed on the announcement day, persisting on the following two days. An increase in depth is rather perplexing while observing increase in depth during the pre-Sox period. Finally, our multivariate analysis reveals that decrease in price and trading activity has a negative impact on liquidity on the following 20-days after the announcement of restatement.

Author

• Kwangjoo (KJ) Koo, William Paterson University