Do stealth restatements convey material information?

Purpose – Effective August 23, 2004, the US Securities and Exchange Commission (SEC) requires all firms to disclose restatements via an item 4.02 Form 8-K filing. However, a significant number of firms continue to disclose restatements using means other than an 8-K. Commonly referred to as stealth restatements, the purpose of this paper is to investigate the materiality of restatements disclosed in either the 10-K or the 10-Q by comparing them to those disclosed via 8-K. Design/methodology/approach – Univariate and multivariate analyses compare the characteristics of and the market reaction to 10-K/10-Q restatements to those of 8-K restatements. Findings – The authors find stealth restatements are more likely to be those not affecting net income, with longer filing delays, not subject to SEC investigation and made by firms audited by non-big four accounting firms. The authors document a negative market reaction to 8-K restatements around the restatement disclosure date. However, for stealth restatements they find no market reaction around the 10-K/10-Q filing date and for up to 22 trading days after the 10-K/10-Q filings. Research limitations/implications – The study shows a significant difference in materiality between stealth and 8-K restatements. Practical implications – The study is important to investors, regulators and academics because it supports the notion that stealth restatements include less significant information relative to that disclosed in 8-K restatements. This result is in line with the SEC disclosure requirement. Originality/value – The significant number of stealth restatements since 2004 begs the question as to what kind of information is being disclosed in these restatements. The paper responds to this question.