An empirical investigation of earnings restatements by UK Firms - Essay Example

For example, in recent years, the frequency of US earnings restatements has increased, attracting considerable attention from academics. Much of that attention has been focused on the relation between earnings restatements and shareholders’ wealth. Moreover, research found that, due to the accounting errors, there was a negative market reaction of earning restatement. There is a very little evidence on the market’s valuation of earnings restatements due to accounting policy changes, and the effect of restatements on financial performance measures, other than market returns.

(Richardson et al. (2002). It is apparent that the restatement amount is significantly associated to future earnings, suggesting that earnings restatement is value relevant in both contemporaneous and inter-temporal settings. whether attributes of restating firms differ from those of non-restating firms in the same industry and from those from various industries included in our samples. After a preliminary examination of the data, the inquiry has motivated concern, as well, over possible accounting abuse due to a lack of study using samples of 200 UK listed companies in the London Stock Exchange.

The financial data for all companies will be collected from Financial Analysis Made Easy (FAME) and conclusions drawn from the analysis of the results. A US study documents an increase in restatement frequency because of errors (Wu, 2002). While giving evidence at the US Senate in January 2002, Paul Sarbanes commented that “frequent restatements of earnings raises questions about the reliability of published financial statements because it threatens to undermine investors’ confidence in the securities markets (comments on the floor of the US Senate, 23 January 2002)”.

It is not surprising that in the case of accounting errors, restatements seem to cause significantly downgraded assessments of firm