Financial restatements by Canadian firms cross-listed and not cross-listed in the U.S.

Canadian financial restatements announced during 1997–2006 lower market quality and signal to market participants that expected future cash flows and their uncertainty are diminished and increased, respectively. Abnormal returns are related to downward revisions in consensus earnings forecasts, and become more negative for U.S. cross-listings, and for revenue recognition and company-initiated restatements. Total residual volatility, its information-based permanent component and the adverse selection spread component increase following such announcements. Relative spreads and a spread-depth market-quality index increase following such announcements and are lower for U.S. cross-listings. Relative spreads (unlike the market-quality index) remain higher post-announcement, and are lower post-Sarbanes-Oxley Act.

► Canadian restatements signal lower expected cash flows and increased uncertainty.
► Abnormal returns are more negative for U.S. cross-listings and differ by type/initiator.
► Restatements increase permanent residual volatility and spreads.
► Relative spreads and spread-depth market quality deteriorate less for U.S. cross-listings.
► Post-restatement relative spread increase is lower post-Sarbanes-Oxley Act.