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Determinants of investor reactions to error announcements : evidence from Germany

  • This paper contributes to the understanding of the German two-tiered enforcement set-up. The first tier is represented by the private review panel FREP, which has been investigating IFRS financial statements since 2005 and ensures consistent and faithful application of the latter. The German securities regulator BaFin, as second tier to the mechanism, enforces disclosure of errors established by either FREP or BaFin and therefore substantiates the adverse disclosure mechanism. We investigate short-term reactions to error announcements published between 2006 and 2013 and find evidence for differences of investor reactions between the early and the current years of enforcement. Disentangling the contributing factors of error severity, we provide evidence that investor reaction is primarily associated with the impact of error announcements on profitability. In addition, we detect that the amount of errors established is negatively associated with investor reaction indicating that extensive error announcements have an attenuating effect on investor reaction. Yet we caution to blindly interpret these findings, since they are also subject to change over time and partially driven by outliers. Further multivariate analyses provide additional insights referring to determinants of investor reactions by examining effects of stated errors on core earnings, effects of errors triggered due to second-guessing the use of professional judgment, and changes of investor perception over time.

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Document Type:Working Paper
Author:Germar Ebner, Matthias HöltkenORCiD, Henning ZülchORCiD
Chairs and Professorships:Chair of Accounting and Auditing
Parent Title (English):HHL Working Paper
Series (Serial Number):HHL-Arbeitspapier / HHL Working paper (141)
Issue:141 (March 2015)
Year of Completion:2015
Page Number:57
Tag:Enforcement; Error announcement; Germany; IFRS; Regulation
Content Focus:Academic Audience
Licence (German):License LogoUrheberrechtlich geschützt