Returns and Risk in the Year after a Restatement Announcement*

Abstract

We extend prior work documenting negative immediate investor responses to restatement announcements by examining the stock returns of restatement firms in the year following an announcement. Using several alternative return measures, we document statistically and economically significant positive returns in the six months after negative restatement announcements, after controlling for the effects of traditional risk factors such as size, book-tomarket and momentum. These returns are robust across a variety of subsamples formed on the basis of firm and restatement characteristics. We find that analyst forecast dispersion increases around restatement announcements and decreases 3-6 months afterward, consistent with an initial increase and subsequent decrease in firm-specific uncertainty and information risk. The postannouncement changes in forecast dispersion are significantly related to concurrent abnormal returns, consistent with the post-announcement decrease in information risk driving the positive post-announcement returns. Our evidence is largely inconsistent with the positive postannouncement returns being attributable to initial investor overreaction.