Institutional Investor Ownership Changes Surrounding Firm Restatement Disclosure Levels

Abstract

This paper examines accounting restatements in the period following the introduction of new disclosure requirements by the SEC in August, 2004. We categorize levels of disclosure (high, medium, and low), specifying the low disclosure restatements as “stealth” (Turner and Weirich 2006; Myers et al. 2008). Controlling for magnitudes, directions, and disclosure levels, we find that abnormal returns are significantly negative for firms with Form 8-K (high disclosure) negative restatements. Firms issuing stealth restatements (low disclosure) appear to avoid negative market consequences. This paper also examines the reactions of different types of market participants to the various disclosure levels of restatements. We find that transient investors (Bushee 1998) anticipate stealth restatements by reducing their holdings in the quarter prior to the restatement announcement. The other investor categories, dedicated and quasi-indexing, decrease their holdings in all restating firms in the quarter following the restatement, but, with stealth restatement firms, the negative relationship is statistically significant for only the dedicated group. These results suggest that transient investors may possess superior information gathering abilities, as well as motivations for early trading, and that dedicated and quasi-indexing investors, even with their long-term investing focus, do ultimately react to firm restatements.