<p class="MsoBodyTextIndent2" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-style: normal; font-size: 10pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-style: italic;"><span style="font-family: Times New Roman;">This paper examines the hypothesis that the stock market overreacted to accounting scandals during 2002, resulting in extensive drops in share value followed by return reversals that reveal market inefficiencies.<span style="mso-spacerun:

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... sp; </span>Data are gathered for nine firms directly involved in an accounting scandal, as well as the major competitors of those firms.<span style="mso-spacerun: yes;">&nbsp; </span>An empirical test of returns for all thirty-three firms reveals that an investment strategy of selling short scandal firms and their competitors, followed by a contrarian investment strategy of buying those same stocks, resulted in risk-adjusted returns well above those expected for a period of one year after the scandal.<span style="mso-spacerun: yes;">&nbsp; </span>These results reveal stock market inefficiencies and a potential to realize abnormal returns by capitalizing on investor overreaction.<span style="mso-spacerun: yes;">&nbsp; </span></span></span></p>