Kyle O'Kane


Original document was submitted as an honors thesis requirement. Copyright is held by the author.

Document Type



This paper investigates whether stock markets react any differently to financial statement restatement information after the events of the 2008 Global Financial Crisis. The research in this paper is trying to demonstrate that financial markets reacted negatively to restatement information following the passing of the Dodd-Frank Act in 2010, ascertain if markets reacted less negatively to post-financial crisis restatements than post-Sarbanes Oxley restatements, and determine whether markets reacted more negatively to restatements of core earnings following the financial crisis period. Little research surrounding the market effects of the financial crisis exist, and it was necessary to further study the effects of restatement information on financial markets, due to its continued importance and relevance. While the impact of restatement information has been studied over previous time periods, primarily surrounding the implementation of Sarbanes Oxley in 2002, it was important to see if the general public placed any additional emphasis on, or displayed any greater awareness of the implications of, a financial statement restatement after the events of the Financial Crisis of 2008.

To investigate this issue, stock price information was collected for a period of time surrounding restatement filing dates for a small sample of companies within two time periods: Post-SOX and Post-Dodd Frank. Analyzing differences in percent changes in stock price between the two samples would allow one to develop conclusions on whether a restatement elicited a stronger or weaker market reaction. A regression model was then used to analyze potential variables within the stock price movement that may have influenced the overall outcome. The primary goal was to determine a degree of correlation between various independent variables and percent changes in stock price surrounding restatement filings for the two samples.

The findings presented some expected results, but some less promising outcomes as well. The analysis of cumulative percentage change in stock price showed that markets reacted negatively to restatement filings after the events leading to the Financial Crisis. Additionally, markets reacted more strongly to restatement information in the Post-Dodd Frank sample, which is contrary to the initial hypothesis, but only by a small margin. Aside from the number of days covered within a restatement period, the regression model failed to provide any statistically significant variables, and the model overall did not achieve statistical significance. The variables selected accounted for roughly 39% of the movement in stock price within the 2005-2007 (Post-SOX) sample, and only about 8% for the 2011-2013 (Post-Dodd Frank) sample. This lack of correlation can be attributed to a number of potential factors; among them the small sample size, the lack of consideration for other variables, and the use of cumulative changes in a stock’s price instead of cumulative abnormal returns, which factors for changes in market prices relative to changes in individual security prices.

It’s difficult to conclude with certainty what the implications of the research are. While the data collected portrays a stronger market reaction to restatements in the post-financial crisis period, the regression model cannot accurately portray the reasoning behind this movement, and even contradicts conventional sequences of thought at times. In a perfect world, one would like to see financial markets displaying a greater understanding of restatement implications, and a stronger awareness of how such information can be identified. Future researchers expanding on this topic should drastically increase the sample size, take cumulative abnormal returns into account, and to account for more variables in the data.