Graduation Year


Date of Submission


Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts



Reader 1

Matthew Magilke

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OCLC Record Number



The purpose of this study is to examine financial reporting restatements for the presence of collateral damage in the market’s reaction. Collateral damage is an assessment of investors’ perception of management credibility and a company’s internal controls. Past research indicates the market reaction displays irrational tendencies following a restatement of earnings. In the legal world, the presence of irrational behavior in the capital markets protects corporations from the efficient market hypothesis in damages estimates. I find a high level of market reaction to be unexplained by cash flow disclosures within the restatement. Though my results do not recognize all the sources of collateral damage at a highly significant level, the data does suggest some inefficient market behavior. When the proportion of the total restatement amount/ market capitalization is held constant, small firms are far more negatively impacted than large firms. In addition, companies are punished in the capital markets for providing additional information to the investors regarding disclosure. My conclusion is that the U.S. federal courts should not continue to rely exclusively on the efficient market hypothesis in determining damages amounts because of the prevalence in collateral damage following corrective disclosures.

This thesis is restricted to the Claremont Colleges current faculty, students, and staff.