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Market reaction muted despite rise in financial restatements: study

investmentexecutive.com

The number of financial restatements has risen sharply over the past decade, but market reactions have grown more muted, according to a study released today by the U.S. Treasury.

The study, conducted by University of Kansas Professor Susan Scholz, examines the growth in financial restatements in the years before and after the Sarbanes-Oxley Act. Financial restatements grew nearly 18-fold, from 90 in 1997 to 1,577 in 2006 with acceleration in restatement activity occurring in 2001 before the implementation of the Sarbanes-Oxley Act.

However, restatements associated with fraud and revenue declined after 2001. Fraud was a factor in 29% of all 1997 restatements, but only 2% of 2006 restatements. The proportion of revenue-related restatements also decreased from 41% in 1997 to 11% in 2006.

It also found that market reactions to the restatements dampened over the period, as the number of restatements grew. Market reaction to financial restatements tended to be more negative when the restatement involved fraud or revenue errors, it said.

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