An Analysis of the Sources of Value Loss Following Financial Restatements

Philip K. Hong, Jaywon Lee, Sang Hyun Park, Sukesh Patro

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


We decompose the total value loss around firms’ announcements of financial restatements into components arising from investors’ revisions in cash flows and discount rates. First, relative to population benchmarks, restatements represent circumstances in which the cash flow component becomes more important in explaining valuations. While we find significant contributions from both sources, with the cash flow component explaining more than 33% of the variation in stock returns surrounding restatement announcements, this component explains only 13% to 22% in comparable non-restating firms. When restatements are caused by underlying financial fraud, the discount rate impact becomes more important, explaining about 88% of return variation. On the contrary, the cash flow impact is relatively larger for firms with higher earnings persistence or restatements associated with errors. Our decomposition of the value loss helps explain returns in the post-announcement period. Firms with a higher relative discount rate impact experience a significant downward stock price drift after the initial announcement-related price decline. For firms with a higher relative cash flow impact, the evidence suggests the initial impact of the restatement announcement is more complete with no subsequent drift pattern. Our findings close gaps in the evidence on financial restatements and extend the literature on the drivers of stock price movements.

Original languageEnglish (US)
Pages (from-to)572-595
Number of pages24
JournalJournal of Accounting, Auditing and Finance
Issue number3
StatePublished - Jul 2023


  • cost of equity
  • equity valuation
  • financial restatement
  • post-announcement drift
  • variance decomposition

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)


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