Investor Reaction to Accounting Misstatements Under IFRS: Australian Evidence

Abstract

We examine the investor reaction to misstatement news for Australian listed firms for the period 2006 to 2013. There are 4.1% of firm years with misstatements and 79% of misstatements are initially disclosed only in the financial statements (stealth misstatements). We find no investor reaction for the average misstatement, reactions of between -2.3% and -2.8% (-1.5% and -1.7%) for misstatements that reduce prior-period earnings or equity (affect revenue), and reactions between -1.3% to -2.7% for nonstealth misstatements. The market reacts more negatively to nonstealth misstatements that reduce prior-period earnings or equity than to stealth ones.