Earnings Comparability, Accounting Similarities, and Stock Returns: Evidence from Peer Firms’ Earnings Restatements
46 Pages Posted: 2 Dec 2011 Last revised: 11 Apr 2017
Date Written: June 9, 2016
Using a sample of earnings restatements, we provide evidence that an empirical measure of the comparability in two firms’ earnings (“earnings comparability”) captures the extent to which a firm’s accounting choices and estimates are similar to those of its restating peer firm. We then document that investors appear to underreact to the implications of this earnings comparability signal. Additional analysis reveals that large traders and short-sellers react in a timely manner, and their trades trigger an immediate negative price reaction to earnings comparability. Small traders appear to behave inattentively, and their herding-driven delayed trades contribute to a negative drift in prices.
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