Markets' reaction to financial restatements of the Top 40 JSE listed companies.

Abstract

There has been a rapid growth of financial restatements. This concerns the investors about the integrity and reliability of the entity’s financial reporting environment and restatements negatively affecting market reactions. Numerous listed companies are restating their financial statements due to inaccurate or misleading information in the previously published financial reports. JSE requires listed firms to correct and amend incomplete or misleading information. A survey on the market reaction around announcements of financial restatements of JSE companies has been a concern and interest to investors, management, and any other concerned parties. As a result, the aim was to examine the causes of financial restatements of the listed top 40 companies in South Africa and establish the markets’ reaction. The study involved the top 40 companies listed on the JSE from 2007 to 2019. The study collected secondary data and the population of thirty-two events was pulled from the JSE SENS. A sample size equaled the entire population of thirty-two events. The window period included 10 days before the announcements, the day of the announcement, and 10 days after the announcement. The IBM SPSS Statistics 27, the statistics software, was used to analyse data. The results indicated a total of thirty-two restatements over a period of thirteen years. The year 2019 was the period that reported the most restatements. Causes of restatements were found to be accounting errors, adoption of the new standard, accounting irregularities, and change in accounting policy. A substantial number of restatements were due to accounting errors. A majority of companies experienced growth in share price on the 10th day after the announcement. Nonetheless, when all days within the window period were included in the analyses, the overall calculation indicated that companies experienced an average decline of - 7.55% in the share price after the announcement. The empirical findings confirm that markets react negatively to the restatements since a significant number of companies exhibited an average decline in share price after the announcement.