Do Retail Investors Understand Restatements? Evidence from Trading Around Fraud vs. Non-Fraud Restatements


The spike in restatements in the early 2000s prompted an important question: Are retail investors able to react to the large volume of restatements, and in particular are they able to differentiate between non-fraud restatements and more serious fraud-related restatements? The latter are associated with more negative announcement-window and post-announcement returns. Using a unique dataset, we directly examine retail investor trading reactions to restatement announcements. We find that retail investors display significantly higher trading volumes during restatementannouncement windows, as well as significantly higher abnormal trading volume for fraud-related restatements than for non-fraud restatements. However, retail investors increase both their buying and selling, and do not sell any more strongly as a percentage of trade for fraudversus non-fraudrelated restatements. We examine the returns following retail investors’ trades and find that retail investors’ share purchases for fraud-related restatements earn significantly negative raw and abnormal returns (e.g., -8% raw returns over three months). This suggests that retail investors’ failure to differentiate between fraudand non-fraud-related restatements may have significant welfare consequences. We further examine the potential role of press coverage and find that retail investors sell more strongly for fraud-related restatements when restatements receive more press coverage. However they continue to buy significantly for fraud-related restatements even when press coverage is high, which leads to subsequent negative returns. Overall, our results suggest that retail investors fail to understand the negative implications of fraud-related restatements.

9 Figures and Tables

Cite this paper

@inproceedings{Li2016DoRI, title={Do Retail Investors Understand Restatements? Evidence from Trading Around Fraud vs. Non-Fraud Restatements}, author={Yifan Li and Devin Shanthikumar and Kevin Chu and Cody Lu and Jonathon Shaw}, year={2016} }