The Vertical Information Transfer Effects of Earnings Restatements Along the Supply Chain

Abstract

Vertical supply chain relations are potentially important information channels as investors infer value relevant information from economic links. We hypothesize that restatements reveal information about the payoff on the implicit claims held by a restating firm's suppliers and customers becomes uncertainty, which results in negative valuation effects on these stakeholders. Consistent with our hypothesis, we find that significant negative abnormal returns to customers and suppliers surrounding restatement announcements. Further, we find that customers and suppliers exhibit a significantly decrease in post-restatement operating performance. We also show that customers and suppliers experience downward analyst forecast revisions after restatement announcements. Finally, we find that the restatement adversely affects the post-restatement relationship-specific investments by customers and suppliers. Overall, our finding suggests that earnings restatement announcement provides valuation-relevant information about both firms in supplier and customer industries of the restating firms.