| This paper examines the information content of earnings following restatements of prior period earnings. Results indicate that the information content of earnings announcements declines in periods following a restatement. However, the results also indicate that the loss of information content is temporary. In particular, the earnings response coefficients for earnings announcements surrounding a restatement exhibit a U-shaped pattern in which they return to pre-restatement levels over an average of four quarters, suggesting that the market's concern regarding subsequently reported earnings is somewhat transitory. The extent to which the earnings of restatement firms suffer a loss of information content varies across several dimensions. Specifically, the loss of information content is greater for firms that restate earnings to correct revenue recognition errors than it is for other types of restatements. In addition, the information content of earnings is higher following a restatement for firms that make changes in their financial reporting governance structure following a restatement relative to firms that do not impose such changes. Overall, the evidence presented in this paper is consistent with a short-term decline in investor confidence regarding financial reporting following restatements, but that recovery typically takes place within four quarters. |
