UBC Theses and Dissertations

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UBC Theses and Dissertations

Studies on the capital market consequences of financial reporting weaknesses Wang, Jing


This thesis is a collection of two studies on the capital market consequences of financial reporting weaknesses. Chapter 2 examines the change in voluntary disclosure of internal control deficiencies (ICD) by IPO firms after the JOBS Act. The JOBS Act postponed the compliance deadline of internal control audits after IPO and increased the number of small IPO firms with potential ICD. I find that IPO firms are more likely to disclose ICD after the JOBS Act. Further, post-JOBS IPO firms who are willing to disclose ICD experience lower underpricing. These results are consistent with a dynamic view that as investors rationally update the belief of increasing “lemons” in the IPO population after the JOBS Act, IPO firms become more forthcoming with ICD disclosure. Chapter 3, co-authored with Professors Weili Ge, Dawn Matsumoto, and Jenny Li Zhang, examines the stock market consequences of disclosing accounting irregularities for U.S. listed foreign firms. We find that foreign firms experience significantly more negative two-day stock market reactions following restatement announcements than U.S. firms. Moreover, for a sample of foreign firms that are listed on both a U.S. and home country stock exchange, we find that restating firms’ U.S. investors react more negatively to the same restatement than their home-country investors. This differential market reaction appears related to firm-specific information frictions that are greater for foreign firms than U.S. firms. We also find a geographic contagion effect as non-restating firms from the same country experience significant stock price declines following restatements. Within a country-year, this contagion effect is concentrated among firms with lower accrual quality, suggesting that foreign firms’ restatements cause investors to alter their assessment of the earnings quality of non-restating firms from the same country. Collectively, our results suggest that accounting irregularities cause U.S. investors to reassess the information risk associated with foreign firms.

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