We decompose the total value loss around firms’ announcements of financial restatements into components arising from investors’ revisions in cash flows and discount rates. First, relative to population benchmarks, restatements represent circumstances in which the cash flow component becomes more important in explaining valuations. While we find significant contributions from both sources, with the cash flow component explaining more than 33% of the variation in stock returns surrounding restatement announcements, this component explains only 13% to 22% in comparable non-restating firms. When restatements are caused by underlying financial fraud, the discount rate impact becomes more important, explaining about 88% of return variation. On the contrary, the cash flow impact is relatively larger for firms with higher earnings persistence or restatements associated with errors. Our decomposition of the value loss helps explain returns in the post-announcement period. Firms with a higher relative discount rate impact experience a significant downward stock price drift after the initial announcement-related price decline. For firms with a higher relative cash flow impact, the evidence suggests the initial impact of the restatement announcement is more complete with no subsequent drift pattern. Our findings close gaps in the evidence on financial restatements and extend the literature on the drivers of stock price movements.

In this study, we examine whether the social capital surrounding the firm’s corporate headquarters mitigates managerial self-dealing in the form of opportunistic insider trading. We find strong evidence that the level of social capital in the region surrounding the firm’s headquarters is negatively and significantly associated with insider trading profitability. We also find that the negative association between social capital and insider trading profitability is more pronounced when governance is weaker and corporate opacity is higher, instances where insiders have greater opportunities to trade on their private information. Further analyses on the potential mechanisms suggest that the negative association is stronger when the firm’s social networks are denser and when the civic norms in the region are stronger. Overall, our article contributes to the growing social capital literature in accounting and finance by providing direct empirical evidence that social capital mitigates managerial self-serving behavior in the form of opportunistic insider trading.

We examine how customer concentration affects managers’ income smoothing incentives to signal their private information about risk and future earnings. We find a negative relation between customer concentration and income smoothing, suggesting that improved information sharing from suppliers to customers through private channels reduces managers’ incentives to smooth earnings. To mitigate endogeneity issues, we perform (a) a change in variables analysis, (b) a propensity score matching approach, and (c) a two-stage least squares regression analysis. Finally, we document that managers’ income smoothing activities decrease as the length of the relationship between a supplier and its major customers increases, corroborating our main findings. Prior studies have paid relatively little attention to the effects of various stakeholders, especially customers, on managers’ income smoothing activities. Our study fills this void in the literature by illustrating that customer concentration is an important determinant of income smoothing incentives.