A new study commissioned by the U.S. Department of Treasury has found that the wave of corporate restatements that soared from 90 in 1997 to 1,577 in 2006 may not be as serious as they appear. The study, by Susan Scholz, an associate professor of business at the University of Kansas, finds that even as the number of restatements rose, the market reaction to them, at least after 2001, declined, as measured by stock price swings.
Were investors and analysts simply becoming accustomed to restatements? Scholz says there may be more logical reasons for the decline in market reaction to such announcements. "What we have found is that since 2001, the number of restatements that involved core issues like revenue or fraud, declined," says Scholz, "while restatements for non-core issues increased." Most of the increased number of restatements represented companies not listed on a major exchange.
Fraud, says Scholz, accounted for 29% of restatements in 1997, but only 2% of the total in 2006, perhaps as a result of Sarbanes-Oxley reforms. At the same time, revenue restatements, which accounted for 46% of all restatements in 1997, accounted for just 11% in 2006.
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A large percentage of the more recent restatements have dealt with non-operating expenses, non-recurring events and reclassifications (collectively up from 26% to nearly 50% of restatements between 1997 and 2006). Scholtz notes that such announcements rarely result in significant negative market reactions.
"A lot of people, including me, bought into the idea that restatements were a SOX story, but clearly that was not it," says Scholtz. "Restatements were increasing before SOX." Scholtz's study does not offer policy proposals. "I was specifically instructed not to make any," she laughs. "But between you and me, there's material in this study for both sides." She says that those who argue that there are too many restatements can point to the dramatic increases over the past decade, but then again, she says companies shouldn't be concerned about them either, since in most cases, market reaction has been muted.
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