Arbeitspapier/Forschungsbericht
Autorenliste: Bannier, Christina E.; Ewelt-Knauer, Corinna; Herrmann, Fabienne; Khaled, Mohamed Amin
Jahr der Veröffentlichung: 2019
This study investigates how investors learn the characteristics of misreporting firms over time from error announcements issued by an enforcement institution. Relying on Fama’s theory of efficient capital markets and Lo’s theory of adaptive markets, we argue that investors use this information to determine firm-specific error probabilities, which they anticipate in their investment decisions. Our research setting allows us to capture investor’s entire learning process over time as an enforcement institution was first implemented in Germany in 2005 and a growing number of error announcements have been issued ever since. Moreover, to the best of our knowledge, we were the first to have access to an estimation model, which is issued by the German enforcement institution (FREP). This model is employed to determine the probability of finding an error during a review, which is based on the FREP’s prior experiences regarding characteristics of companies not receiving an error announcement compared to misstating companies. We use this model to proxy investors’ estimation about a firm’s error probability. By conducting a short-window event study and multivariate regression analysis, we can show that the higher the error probability of a firm, the less surprised is an investor when an actual error announcement is published. This results in a less adverse market reaction of firms with a high error probability. Vice versa, we find a more serious capital market reaction to an error if the FREP announces an error statement for a company with a lower probability of errors. This is due to the fact that information about low financial reporting quality comes unexpectedly and has not been processed by the capital market until then. Moreover, there is a highly significant time-varying effect suggesting that the capital market has learned to recognize infringing firms over time. Our research outlines how enforcement institutions enable investors to anticipate firm-specific error probabilities over time and explains why capital market reactions upon error announcements are weak in some cases. Moreover, in a broader research context, our dataset allows us to prove investor’s adaptive learning over time empirically which prior studies have only predicted analytically so far given efficient capital markets.
Abstract:
Zitierstile
Harvard-Zitierstil: Bannier, C., Ewelt-Knauer, C., Herrmann, F. and Khaled, M. (2019) Learning from the Bad Guys - What Investors Learn from Error Announcements over Time. https://www.uni-giessen.de/de/fbz/fb02/fb/professuren/bwl/bannier/forschung/BannierEweltKnauerHerrmannKhaled.pdf
APA-Zitierstil: Bannier, C., Ewelt-Knauer, C., Herrmann, F., & Khaled, M. (2019). Learning from the Bad Guys - What Investors Learn from Error Announcements over Time. https://www.uni-giessen.de/de/fbz/fb02/fb/professuren/bwl/bannier/forschung/BannierEweltKnauerHerrmannKhaled.pdf
