Financial restatements and sell-side analysts' stock recommendations: evidence from Malaysia

• Main Authors: Qasem, Ameen, Aripin, Norhani, Wan Hussin, Wan Nordin
• Format: Article
• Language: English
• Published: Emerald Group Publishing Ltd. 2020
• Subjects: HF5601 Accounting
• Online Access: http://repo.uum.edu.my/27320/1/IJMF%2016%204%202020%20501%20524.pdf; http://repo.uum.edu.my/27320/; http://doi.org/10.1108/IJMF-05-2019-0183
• Institution: Universiti Utara Malaysia

Purpose – The purpose of this paper is to examine the influence of financial restatements on the sell-side analysts’ stock recommendations. Design/methodology/approach – The sample of this study is based on a dataset from a panel of 246 Malaysian public listed companies for the period 2008 to 2013 (651 company-year observations). This study employs feasible generalized least squares regression.Findings – This study finds a negative and significant relationship between restated companies and sell-side analysts’ stock recommendations, which means that sell-side analysts issue less favorable stock recommendations for restated companies. Practical implications – The findings based on observations from an emerging economy complement the results of the US studies that analysts revise their earnings forecasts or recommendations downwards or drop coverage following financial restatements. The results of this study should be useful to capital market participants in understanding how analysts perceive and evaluate restated companies.Originality/value –This paper expands the literature on financial restatements consequences in an emerging market which is largely unstudied. Prior research on analyst behavior towards restatements has focused on the consequences of restatements in terms of analyst following and forecast accuracy and dispersion. This study examines if and how the restatements affect the analysts’ final output as reflected in the recommendation opinion, an area that has so far received little attention.