Short-term performance of stocks after fraudulent financial reporting announcement

Abstract

Purpose

Availability of accurate and reliable information in financial markets helps investors make well-informed decisions on capital allocations which is beneficial for long-term economic growth. In this regards, the role of auditing firms that inspect the financial statements of the publicly traded companies in sound operation of financial markets has been increasing. The Capital Market Board of Turkey (CMBT) has the task and responsibility of investigating fraudulent information disseminated by the firms whose stocks are traded in Borsa Istanbul. The investigations can lead to monetary penalties if fraud is proven and the results are published by CMBT in its weekly bulletin. The present study aims to examine the effect of announcements of financial irregularities of companies in CMBT Bulletin on the performance of the relevant company stock in the short term.

Design/methodology/approach

This study uses abnormal return, cumulative abnormal return and cumulative average abnormal return as metrics and parametric, as well as non-parametric tests to ascertain whether the announcements of financial irregularities in company operations have any statistically significant effect on the return of its stock.

Findings

The results indicate that publication of the financial penalty news by CMBT in its bulletin has almost no statistically significant influence on the performance of the relevant companies’ stock in Borsa Istanbul. The findings indicate that either the investors in this particular markets do not consider such news relevant to long-term success of the firm or the announcement does not provide any new information and penalties have been priced into the stock before the announcement in the bulletin.

Originality/value

In literature there is no more research about the effect of the announcements of administrative monetary penalties and crime complaints on the stock returns.

Citation

Eryigit, M. (2019), "Short-term performance of stocks after fraudulent financial reporting announcement", Journal of Financial Crime, Vol. 26 No. 2, pp. 464-476. https://doi.org/10.1108/JFC-11-2016-0076