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

See all articles by Weishi Jia

Weishi Jia

Cleveland State University - Monte Ahuja College of Business

Jingran Zhao

Emory University - Department of Accounting

Date Written: November 10, 2014

Abstract

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.

Suggested Citation

Jia, Weishi and Zhao, Jingran, 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. (November 10, 2014). Available at SSRN: https://ssrn.com/abstract=2522520 or http://dx.doi.org/10.2139/ssrn.2522520

Weishi Jia (Contact Author)

Cleveland State University - Monte Ahuja College of Business ( email )

1860 E 18th St #420
Cleveland, OH 44114
United States

Jingran Zhao

Emory University - Department of Accounting ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

HOME PAGE: http://https://sites.google.com/site/jingranzhaous/

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