Investor Sentiment Effects on Market Reaction to and Disclosure Choices of Accounting Restatements

Abstract

My thesis examines the influence of investor sentiment on the announcement of restatements of financial information by companies. I examine two aspects: how market sentiment affects investors’ response to a restatement and manager’s disclosure choices as a result of these effects. Further, I consider how the individual characteristics of the restatement will affect the above. I find positive (negative) market sentiment increases (decreases) a negative share price reaction to a restatement. This is dependent on the characteristics of the restatement, with those adversely affecting past year financial statements resulting in more negative share price reactions when sentiment is positive whereas the opposite relationship is seen for those involving past year’s revenues. Entailing from the observed relationship, I expect and observe managers opportunistically varying disclosure venues by announcing adverse (revenue misstatement) restatements in the more (less) transparent venues of press release and SEC filings. In contrast to my expectations, I find among SEC filing types, the likelihood of the more transparent Form 8-K disclosure increases when the effect of sentiment on the restatement type is to increase negative market reactions to the initial announcement. However, I believe this result is affected by the issuance of the SEC ruling with regards to Form 8-K disclosure, leaving managers little opportunities to vary their disclosure choices.