Family Control, Accounting Misstatements, and Market Reactions to Restatements: Evidence from China

51 Pages Posted: 16 Aug 2014

See all articles by Liangbo Ma

Liangbo Ma

University of Wollongong - School of Accounting, Economics & Finance

Shiguang Ma

University of Wollongong - School of Accounting Economics and Finance

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Date Written: August 14, 2014

Abstract

We examine the impact of family control on the likelihood of accounting misstatements and market reactions to subsequent restatements. Using a matched-firm approach, we find that family control overall reduces the incidence of misstatements, consistent with the notion that controlling families have greater reputation concerns than nonfamily blockholders. However, compared to nonfamily firm restatements, restatements announced by family-controlled firms trigger significantly more negative market reactions, which are even more pronounced when the risk of expropriation by controlling shareholder is higher. We also find a larger drop in the information content of earnings in family restatement firms than in nonfamily restatement firms. We attribute the stronger market reactions and the larger loss of earnings informativeness to greater investor skepticism of the credibility of corporate insiders and lower perception of earnings quality in family-controlled firms following restatements. Our study highlights that investors are more sensitive to the deterioration in earnings quality in family-controlled firms than in nonfamily-controlled firms, which in turn affects market reactions to accounting restatements.

Keywords: Family firm; Restatement; Earnings quality; Market reactions

JEL Classification: D8; G14; G32; M41

Suggested Citation

Ma, Liangbo and Ma, Shiguang and Tian, Gary Gang, Family Control, Accounting Misstatements, and Market Reactions to Restatements: Evidence from China (August 14, 2014). 27th Australasian Finance and Banking Conference 2014 Paper. Available at SSRN: https://ssrn.com/abstract=2480791 or http://dx.doi.org/10.2139/ssrn.2480791

Liangbo Ma

University of Wollongong - School of Accounting, Economics & Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia

Shiguang Ma (Contact Author)

University of Wollongong - School of Accounting Economics and Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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