Market Reaction To Financial Restatements For Investors

Information is the guarantee of the capital market. If there is no information, there is no so-called capital market. Financial statement from listed companies are the main information which investors make investment decisions based on. So the published financial statements of listed companies are closely related to investors’decision-making, are directly affecting the normal operation of the capital markets.From the TCL Incident in2001, we can see that the restatement of financial system in China’s capital market exists lots of loopholes, and it is not regular in the provisions of financial restatement. A large number of accounting scandals are seriously harmful to the interests of investors, greatly undermine investors’confidence in the quality of accounting information, largely inhibit the normal operation of the capital market.Financial restatements occurred frequently, causing widespread concern for the majority of investors. The paper chooses the Shanghai and Shenzhen listed companies which release the temporary announcements of accounting errors from the year2008to2012as the research samples and studies the market reaction to the different nature of the financial restatement using the methods of Event Study and Pearson coefficient. The paper attempts to answer two problems.￤hat is the different market reactions when restatement message is good news, bad one, the uncertain one or no effect one?②Before and after the restatement, how does the relationship among abnormal return of the stock, earning per share and cash flow per share change for the four different message? It is trying to answer that investors should believe the information of the income statement or the information of cash flow which cannot be easily manipulated after the financial restatement.The results of the study confirmed that,①There were different market reactions when the companies released different restatement messages. Good news did not bring the expected positive market reaction, on the contrary it brought negative market reaction. Bad news brought the expected significant negative market reaction. Uncertain news brought uncertain direction market reaction. No effect news brought negative market reaction than expected.②When researching restatement company’s the relationship among abnormal return of the stock, earning per share and cash flow per share, it found that the relationship among them did not change much when restatement announcement was good news. Abnormal return of the stock was more relevant to earnings per share before restatement, and more relevant to cash flow per share after restatement. Maybe because of the release of financial restatement announcements, investors lower the confidence to financial information. Investors began to seek indicators that cannot be easily manipulated, such as cash flow, in making investment decisions. The relationship among them was high before restatement when announcement was uncertain news, but there was no correlation after the restatement. Maybe investors cannot determine whether it was good or bad. The relationship among them did not change much when restatement announcement was no effect.