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July 1, 2002 (Atlanta) - "The recent levels of restatements raise questions about the caliber of management (ranging from "can they add" to "are they up to mischief" or worse), and the efficacy of the auditing profession," says James Owers, finance professor at Robinson College of Business at Georgia State University. Owers recently completed a study analyzing the market response to earnings restatements and found "statistically significant negative revaluations."
"Restatements are not a recalibration of investors' expectations, but a change in results previously announced to be the "real numbers." -- after the fact, and supposedly final," said Owers. "Thus, they are dramatic for several reasons. The previous hard numbers were incorrect. Not surprisingly, that influences and changes stock values."
Owers has been researching the causes and financial consequences of accounting restatements for the past 10 years. This latest study, "The Informational Content of Different Categories of Earnings Restatements," recently published in the International Business & Economics Research Journal, (co-authored by Ronald Rogers of the University of South Carolina and Chen-Miao Lin of Georgia State University), examines nine categories of restatements: accounting issues (errors/irregularities/method- change); SEC initiated; acknowledged fraud; earnings/loss arrangement; resulting from a restructuring or spin-off; associated with a legal settlement; merger or joint venture related; caused by a stock split/dividend; and reason not determined.
Based on the research, investors react most negatively to restatements resulting from accounting issues (i.e. errors/irregularities/method-changes) which is magnified when there is a contemporaneous change in a firm's CEO. In these circumstances, the shares of affected firms on average fell 37% in two weeks.
A notable feature of the findings is that for some categories there are valuation changes in response to accounting restatements that are seemingly just recording the implications of previously announced corporate happenings. In the context of efficient market perspectives, some of these changes at the time of the restatement announcement itself are somewhat surprising.
According to Owers, history can teach us a lesson.
"The unfair practices of the 1920s were revealed in the chaos of the market crash of 1929 and subsequent developments in the 1930s," he said. "Ultimately the SEC's formation in 1934 helped begin the process of restoring confidence. Generally, that system of regulatory processes served us well for 60 years, but may have developed unacceptable flaws in the late 1990s. Hopefully, the response to the current accounting crisis and attendant governance, ethical and legal lapses within some large public companies will not lead to such dire economic disruption. Definitive and aggressive action appears necessary to minimize additional damage."
Owers can be reached directly at 404/413-7320
He can also be reached via email at mailto:owers@gsu.edu.
Media Contact:
Tammy DeMel
Associate Director, Communications and External Affairs
J. Mack Robinson College of Business
Phone: 404/413-7078
Pager: 404/382-1527
mailto:tdemel@gsu.edu | 
