The Spillover Effect of Financial Restatements on Peer Firms’ Stock Repurchases

This paper documents the spillover effect of firms' financial restatements on their peer firms' stock repurchases. In a difference-in-differences setting, I find a causal relationship where one firm's financial restatement increases its peer firms’ propensity to repurchase shares by 12.9 percent. Evidence attributes this spillover effect to peer firms of higher accounting quality separating from the pooling equilibrium with peer firms of lower accounting quality, thus mitigating accounting-related litigation. Correspondingly, repurchasing peer firms have lower accruals, lower probability of restating their own financial statements, and fewer class action lawsuits against firm accounting practices than their counterparts without stock repurchases