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Stealth Disclosure of Accounting Irregularities: Is Silence Golden?
Edward P Swanson, Texas A & M University
Senyo Tse, Texas A & M University
Rebecca L Wynalda, Texas A & M University
ABSTRACT. Companies are allowed considerable discretion over how they announce restatements. Disclosure ranges from a press release headlining the restatement to simply changing comparative-period amounts reported in the next earnings release, i.e., stealth disclosures. We show that a larger 3-day price decline is associated with more prominent disclosure. We do not believe the larger decline is due to more severe restatements: First, the decline remains after we control for severity. Second, firms providing stealth disclosures experience an additional negative return over the next 10 days sufficient to eliminate their initial return advantage. These results indicate a penalty for openness occurs at the announcement date but is not long-lasting. We also find evidence of a more long-lasting penalty: Firms that prominently disclose the restatement are more likely to be sued, even after controlling for restatement severity and dismissed lawsuits. Our overall results indicate silence is golden.
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