Earnings Comparability, Accounting Similarities, and Stock Returns: Evidence From Peer Firms’ Earnings Restatements

Using a sample of earnings restatements, we provide evidence that an empirical measure of the comparability in two firms’ earnings (“earnings comparability”) captures the extent to which a firm’s accounting choices and estimates are similar to those of its restating peer firm. We then document that...

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Bibliographic Details
Published in:Journal of accounting, auditing & finance auditing & finance, 2017-10, Vol.32 (4), p.480-509
Main Authors: Campbell, John L., Yeung, P. Eric
Format: Article
Language:English
Subjects:
Accounting procedures
Financial restatements
Income statements
Stock prices
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Summary:Using a sample of earnings restatements, we provide evidence that an empirical measure of the comparability in two firms’ earnings (“earnings comparability”) captures the extent to which a firm’s accounting choices and estimates are similar to those of its restating peer firm. We then document that investors appear to underreact to the implications of this earnings comparability signal. Additional analyses reveal that large traders and short sellers react in a timely manner, and their trades trigger an immediate negative price reaction to earnings comparability. Small traders appear to behave inattentively, and their herding-driven delayed trades contribute to a negative drift in prices.
ISSN:0148-558X
2160-4061
DOI:10.1177/0148558X17704105