Behavioral Analysis of the Capital Market Reaction to Financial Restatements with Emphasis on the Psychological Dimensions of Investors

Document Type : Research

Authors
hamid birjandi 1
Zahra Fathi 2
Masoud Birjandi 3
1 * PhD in Accounting, Kerman Branch, Islamic Azad University, Kerman, Iran
2 - PhD Graduate, Accounting, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Iran
3 - Department of Management, Kho.C., Islamic Azad University, Khonj, Ira n
10.22034/smajournal.2026.543036.1127
Abstract
 This study aims to analyze the impact of financial restatements on the stock market reaction and to examine the moderating role of investor sentiment in the Tehran Stock Exchange. Using panel data from listed companies during the period 2014 to 2024 and applying a fixed effects regression model, the findings indicate that financial restatements have a negative and significant effect on cumulative abnormal stock returns. This result is consistent with asymmetric information theory and signaling theory, suggesting that restatements, as a signal of reduced financial reporting quality, diminish investor confidence and lead to stock price declines. Furthermore, investor sentiment plays a significant moderating role; during periods of high sentiment, the market’s negative reaction to restatements is intensified. In addition, firm fundamentals (size, profitability, and information transparency) also moderated the market reaction; smaller, less profitable firms with lower transparency experienced a stronger negative reaction, supporting liquidity and firm risk theories. Overall, the results strongly indicate that financial restatements serve as a negative signal, prompting adverse market reactions, and that the intensity of this reaction is significantly influenced by investor sentiment and firm fundamentals.

Keywords

Subjects

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Strategic Management Accounting
Volume 2, Issue 4 - Serial Number 4
Winter
Winter 2026
Pages 92-113