After a Restatement: Long-Run Market and Investor Response*

We examine returns in a long window surrounding earnings restatements. We find statistically significant positive returns in the six months after negative restatement announcements, especially in the 3-6 month window using several alternate measures. Results suggest these returns are not a result of traditional risk factors or a permanent shift in cost of capital. We relate returns to analyst forecast variables to examine the driver of positive medium-term returns. Analyst forecast dispersion increases around the announcement and decreases 3-6 months after, consistent with an initial increase and subsequent decrease in firm-specific uncertainty and information risk, which would lead to positive returns in the 3-6 month window after the announcement. Analyst forecast errors do not become overly negative or subsequently drift upwards, inconsistent with an investor overreaction and correction explanation for the pattern in post-announcement returns. Finally, we examine changes in institutional ownership. Transient and quasi-indexing institutions sell before the announcement but buy after, and the event-time trading of dedicated (transient and quasi-indexing) institutions has some positive (negative) predictive ability for future returns. Together, results suggest transient and quasi