The Contagion Effects of Accounting Restatements

49 Pages Posted: 15 Sep 2004

See all articles by Cristi A. Gleason

Cristi A. Gleason

University of Iowa - Department of Accounting

Nicole Thorne Jenkins

University of Virginia - McIntire School of Commerce

W. Bruce Johnson

University of Iowa - Department of Accounting

Date Written: January 2007

Abstract

We predict and find that accounting restatements that adversely affect shareholder wealth at the restating firm also induce share price declines among non-restating firms in the same industry. Peer firms with high industry-adjusted accruals experience a more pronounced share price decline than do low accrual firms. This accounting contagion effect is concentrated among revenue restatements by relatively large firms in the industry. We also find that investors impose a larger penalty on the stock prices of peer firms with high earnings and high accruals when peer and restating firms use the same external auditor. Our results are consistent with the notion that some accounting restatements cause investors to reassess the financial statement information previously released by non-restating firms.

Keywords: Accounting Quality, Contagion, Earnings Quality, Information Transfer

JEL Classification: G34, D80, G12, M41, M43

Suggested Citation

Gleason, Cristi A. and Jenkins, Nicole Thorne and Johnson, W. Bruce, The Contagion Effects of Accounting Restatements (January 2007). AAA 2005 FARS Meeting Paper, Available at SSRN: https://ssrn.com/abstract=591689 or http://dx.doi.org/10.2139/ssrn.591689

Cristi A. Gleason (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

Nicole Thorne Jenkins

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

HOME PAGE: http://https://www.commerce.virginia.edu/faculty/nt4jw

W. Bruce Johnson

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-1048 (Phone)
319-335-1956 (Fax)

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