The Divergence Between Cash Flow Rights And Controlling Rights, Nature Of Ownership And Restatement

With the develop of the corporate government theory, the cornerstone of the corporate governance witnessed an experience from the widely held owned structure (Berle and Means,1932) to the ultimate ownership structure (La Port et al.,1999). The ultimate controlling shareholders exercise control and ownership asymmetrically with the aid of the pyramidal owned structure etc. The existence of ultimate shareholder may make two-side impact on the corporate government:one is the alignment effect, which suggests that large shareholders have more resources and expertise to monitor managers and would lose more from their firm’s decline in market value than they could gain by diverting their firm’s cash flow to themselves. The other one is the entrenchment effect, which predict that ultimate shareholders would have the incentives to expropriate wealth from other shareholders and manage earnings for their private benefits. The two effects of concentrated structure are subject to the development of capital market and the investor protection.In recent years, family enterprise, representative of the private listed companies, has gained larger proportion of the capital market, and behavior differently with the state-owned enterprises. In the background of economic transition, this article conjecture that the entrenchment effect on financial reporting quality, concerning the ownership of listed companies, dominates the alignment effect among listed firms in China.This article used China’s A-share listed companies (from 2008 to 2012) to study the correlation between the financial information quality (measured as the likelihood of restatement) and the conflict between controlling shareholders and other shareholders (measured as the diverge between voting rights and cash flow rights). The result shows that in the context of a civil-law system and less developed market: the likelihood of accouting restatement is higher for family firms than non-family firms when there is greater control-ownership divergence of the controlling shareholders. Besides, this article also finds that family firms are associated with a longer period being affected and a greater number of accounts being affects, but not mandatory restatement.