Does the Market Punish the Many for the Sins of the Few? The Contagion Effect of Accounting Restatement for Foreign Firms Listed in the U.S.
38 Pages Posted: 14 Nov 2014
Date Written: November 10, 2014
In this paper, we hypothesize and find that accounting restatements issued by foreign firms traded in the U.S. induce a negative market reaction to non-restating foreign firms that are from the same home country as the restating firms (restatement-induced home-country contagion effect). Moreover, the magnitude of the contagion effect varies with the strength of the home market institutions of the restating firms. Non-restating firms from countries with a weak rule of law underwent an average stock price decline of about -1.11% while peer firms from strong rule of law countries experience an average negative return of only -0.18% over a three-day announcement window. Our results suggest that restatements filed by weak rule of law country-firms appear to be more “contagious” than those issued by strong rule of law country-firms. This is consistent with the notion that U.S. investors take into account the strength of home market institutions of foreign firms when evaluating the information disclosed by restatements.
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