Cooking the Books: Recipes and Costs of Falsified Financial Statements in China

55 Pages Posted: 12 Nov 2010

See all articles by Oliver M. Rui

Oliver M. Rui

China Europe International Business School (CEIBS)

Michael Firth

Lingnan University - Department of Finance and Insurance

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Date Written: November 12, 2010

Abstract

We examine the causes and consequences of falsified financial statements in China. Using bivariate probit regression analysis, we find that firms with high debt and that plan to make equity issues are more likely to manipulate their earnings and thus have to restate their financial reports in subsequent years. We also find that corporate governance structures have an effect on the occurrence and detection of falsified financial statements. There are significant negative consequences to financial misrepresentations. Restating firms suffer negative abnormal stock returns, increases in their cost of capital, wider bid-ask spreads, a greater frequency of modified audit opinions, and greater CEO turnover. We also find that firms located in highly developed regions suffer more severe consequences when they manipulate their accounts.

Keywords: Falsified Accounts, Financial Restatements, Regional Development, Corporate Governance, Causes and Consequences of Restatements

JEL Classification: G14, K22, M41

Suggested Citation

Rui, Oliver M. and Firth, Michael and Wu, Wenfeng, Cooking the Books: Recipes and Costs of Falsified Financial Statements in China (November 12, 2010). Available at SSRN: https://ssrn.com/abstract=1708148 or http://dx.doi.org/10.2139/ssrn.1708148

Oliver M. Rui (Contact Author)

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

HOME PAGE: http://https://www.ceibs.edu/rui-oliver

Michael Firth

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
+852 2616 8160 (Phone)
+852 2466 4751 (Fax)

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 535 Fahuazhen Road
Shanghai, Shanghai 200052
China

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