Ownership Structure And Financial Restatements Of Public Companies

Recently, the financial restatements of listed companies in China are common occurrences, with it, various problems caused by financial restatements followed.Whether the listed company’s management is based on the supervisory and urgent role of the board of directors or supervisors etc.internal departments to correct accounting errorsforwardly,or based on the restrictive role of the ministry of finance or the securities and futures commission etc. external regulators to correct accounting errors passively, the listed companies will always suffer a lot of losses in economy or reputationbecause of the financial restatements.The reason why financial restatements can produce such heavy negative impacts on listed companies is that the financial restatements are usually received by capital market as a bearish signal which meaning that the companies of financial restatements defects in the accounting information system, the disclosure quality of financial reports and the operation ability of management. Thus, from the perspective of investors, they will be skeptical of the authenticity of the presented financial reports after the listed companies restating, at the same time, lowering the expectations of the listed companies’ future cash flow, sometimes even directly selling the stocks to minimize their economic losses. From the perspective of the listed companies, managements adopt aggressive accounting policies driven by management demands or the self-interest behaviors, which easily resulting in financial restatements and then triggering the weird behaviors of management change, while the frequent management changes often leading to the unstable corporate governance structure, increasing the operational risk and improving the companies’ cost of capital. From the perspective of the capital market, the accounting information errors which existing beforethe disclosure of financial restatements had misled investors in decision-making, so the phenomenon that the stock prices falling sharply and the hundreds of millions of market value evaporating instantly after the exposure of financial restatements was not surprising, however, it would seriously disrupt our capital market pricing mechanism,reduce the efficiency of resource allocation, which making our capital market usually trapped in a turmoil state. Therefore, it is urgent for us tostandardize the financial restatements of Chinese publiccompanies, otherwise our capital market will endure fatal injuries. We can start from the internal corporate governance and the external strict monitoring aspects tonormalize the financial restatements of listed companies. On the one hand, we cantreatment the sickness of listed companies’ financial restatements radically by the ways of improving the level of corporate governance orreducing the agency costs. On the other hand, we can attempt to give an auxiliary therapy aiming at the sickness of financial restatements by the methods of enhancing the external supervision power, such asthe ministry of finance or the securities and futures commission.Considering thatthe ownership structure is the foundation of corporate governance, we should regard the ownership structure as a breakthrough point to analyze the financial restatements of public companies on the condition that we want to solve the restatement problems by advancing the level of corporate governance. Therefore, this paper finishes the empirical research under the background of the reform of the shareholder structure which studying the relationship between the ownership structure and financial restatements of public companies. The empirical research not only can provide reliable evidence for standardizing public companies’ financial restatements, reasonable reference for perfecting the corporate governance mechanism, meantime, useful decision-making information for investors, but also can examinethe implementation effects of the reform of the shareholder structure from the standpoint of financial restatements.Firstly, this paper describes thebackground and significance of the effect that ownership structure puts on the financial restatements. Secondly, it presents a systematic review of the regarding literature about the ownership structure, and the financial restatements of listed companies, and exploring the above-mentioned relationship. Then, the paper elaborates fundamental theories of ownership structure and financial restatements, and upon this basis, it further illustrates that how the ownership concentration, ownership balance degree and nature of ownership works on the financial restatements through the corporate governance mechanism. Furthermore, this paper focuses on researching the relationship between ownership structure and financial restatements with the principal agentand the asymmetric information theories, which taking the Shanghai and Shenzhen A-share public companies’ data from 2008 to 2013 as the study object. The research results indicate thatthe listed companies with higher ownership concentration, greater proportion of state-owned shares and tradable shares will have a smaller probability to restate. It obviously shows us that the large shareholders have more intense motivation and wishes to monitor management after the share reform, the state-owned shareholders gradually play an active role in the capital market, the tradable shareholders’ strict supervision upon the financial information disclosure using the ‘vote with their feet’ approach seems to be paying off. Finally, based on the empirical analysis, this paper proposes the policy recommendations, including strengthening the power of fostering institutional investors, promoting the development of the balance of ownership structure, perfecting the legal mechanism of the minority shareholders’ interest protection, and building the incentive mechanism about managers, to suppress the behaviors of listed companies’ financial restatements.