Investors punish material restatements, study says

[SMU Associate Professor of Accounting] Chen Xia and [SMU Professor of Accounting] Cheng Qiang have co-written a paper with Boston College Professor Alvis Lo confirming that investors have low tolerance and a long memory for companies that issue material restatements to correct accounting irregularities. The paper indicated that companies experience a significant decline in investor response to earning statements for 11 quarters after a restatement is announced.  The study examined investor response to more than 1,200 restatements from 1997 through mid-2006, with 343 of those restatements regarded as material because they involved some kind of fraud or accounting irregularity.