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Disclosure Credibility and Market Reaction to Restatements
Elizabeth A. Gordon, Rutgers University
Elaine Henry, University of Miami
Marietta Peytcheva, Rutgers University
Lili Sun, Rutgers University
ABSTRACT. This study investigates whether disclosure credibility is associated with market reaction to restatements. We examine two factors of disclosure credibility: firm’s management and restatement announcement characteristics. Results indicate greater management credibility (higher amount of and less positive prior tone of disclosure) is associated with a less negative market reaction. Restatement announcement characteristics are also associated with market reaction. Emphasizing restatement through officer comments and headline appearance is associated with negative market reaction, while more specificity reduces negative market reaction. Further, we find management credibility and restatement announcement characteristics have equivalent explanatory power, and act as complements rather than substitutes.
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