Cash Flow Restatements: Stock Market Reaction to Overstated versus Understated Restatements

Elio Alfonso, Dana Hollie, Shaokun Carol Yu


The Securities and Exchange Commission has become increasingly concerned with the rising number of restatements to statements of cash flows (SCFs). Regulators and practitioners are generally more focused on the overstatement of operating cash flows, while the understatement of operating cash flows is often overlooked but may have the same (or more) negative economic consequences. We examine market reactions to cash flow restatements (CFRs) where firms overstate or understate cash flows from 2000 to 2013. This study finds that 41% of firms overstated operating cash flows, while a surprising 48% understated operating cash flows. While we find that the market does not react to overstated operating cash flows or overstated total cash flows (TCFs), we find a negative response to understated operating cash flows and understated TCFs. Interestingly, the market penalizes these firms more for understating rather than overstating cash flows. There is a CFR disclosure post-announcement drift in abnormal returns that occurs for both understated operating and understated TCFs. We provide evidence that the often-overlooked understated CFRs may have “real” economic consequences and that they should be evaluated further and given the same consideration as overstatements by auditors, regulators, and investors.

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