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Erroneous Accounting Information and the Efficiency of Industry Investment
Claudine Mangen,
Concordia University
Artyom Durnev, McGill University
ABSTRACT. The literature shows that restatements of financial statements are associated with a significant decline in the market value of restating firms' competitors. The present study hypothesizes that competitors’ market value falls because their past investments were affected by the restating firms’ erroneous financial statements. Investments based on erroneous information likely are inefficient. The inefficiency of competitors' past investments is revealed at the restatement announcement, when the errors in the restating firms' financial statements are exposed. Consistent with this hypothesis, this study finds that competitors experience more negative abnormal returns at restatement announcements if their past investments were more inefficient. Furthermore, when competitors' past investments were affected to a larger degree by erroneous accounting information, they were more inefficient and competitors' subsequent market value losses at the restatement announcement are larger.
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