Corporate Investments: Learning from Restatements



    1. McGill University
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    1. Concordia University. We are grateful for helpful comments and suggestions from an anonymous referee, Douglas J. Skinner (editor), Max Blouin, Patrick W. Daly, Arianna Degan, Steve Fortin, Simi Kedia, Stas Kolenikov, Michel Magnan, Randall Morck, Gil Sadka, Jerry Zimmerman, and Luigi Zingales. We also thank the workshop participants at Concordia University, McGill University, University of Ottawa, Queens University, the 2007 American Accounting Association Meetings, and the 2007 American Law and Economics Association Meetings, where earlier versions of the paper were presented under different titles. All errors are our own. Art Durnev thanks the Institut de Finance Mathématique de Montréal (IFM2) for supporting this research. Claudine Mangen thanks the Concordia University Research Fund for funding.
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This study analyzes the information conveyed by the restatements of financial reports. We argue that restatements contain news about the investment projects of the restating firms' competitors. This news causes competitors to revise their beliefs about the projects' value, and to modify their subsequent investment decisions. Accordingly, we hypothesize that changes in competitors' investments after restatement announcements are related to news in the restatements. Consistent with our prediction, we find that changes in competitors' investments following restatement announcements are significantly related to various proxies for news in the restatements, such as competitors' and restating firms' abnormal returns at the restatement announcements. We conclude that restatements convey information about the investment projects of restating firms' competitors.