What impact do restatements have on the share price? Do investors pick up signals before the company decides to come clean? And how do companies that overstate their earnings perform before they actually come out with the truth?

These are the questions addressed in a paper from Jospeh Golec and John Harding from the University of Conneticut and Katsiaryna Salavei from Fairfield University.

One of the most striking findings in their paper, Do investors see through mistakes in financial statements? Long run evidence from restatements, found that firms that made down restatements had enjoyed significantly high returns two and three years before the error period. What does that tell us? Simply that those companies might have been under a lot of pressure to maintain that outperformance. Hence the fiddling with numbers that ultimately led to a restatement.

The study also found evidence that investors are a lot smarter than the company's executives think. They quickly see through the overstated earnings and penalize the share price soon afterwards.

Also, the study found that investors don't just wait for financial statements to reveal all. They also draw their conclusions from other sources including industry statistics, government data, competitors earnings announcements.