AccountingrestatementsAcomparisonbetweenChinaandUSA.docVIP

Accounting Restatement: A Comparison between China and USA WANG Xia *(Renmin University of China, Beijing 100872, China) Abstract: This paper compares the accounting restatement between American listed companies and Chinese ones. We find that there are some difference significantly existed in four aspects: institutional background, characteristics of restatement, marketing reactions of restatement events and the effects of corporate governance of restating companies. We find that Chinese case is unlike the prior results of U.S. firms, and there are no significant returns associated with corrections announcements because the corrections in China are announced in earnings releases. Consistent with prior literature where U.S. data are used, corporate governance in Chinese capital market can at least partly explain why accounting restatements have become common. Key words: accounting restatement; institutional background; characteristics; market reaction; corporate governance In America, accounting restatement has become an increasingly common phenomenon in financial reporting. Restatements clearly signal that the firm’s prior financial statements are not credible and are of relatively lower “quality”. A restatement can cause investors to reevaluate their expectations for future prospects of the firm, either because amended historical results trigger a reassessment of expected future cash flows or because the restatement calls the credibility of management into question. Prior research has shown that restatements of financial statements result in a substantial loss of market value. For example, the former Chairman of Securities and Exchange Commission (SEC) testified before a Senate Subcommittee that, “in recent years, countless investors have suffered significant losses as market capitalizations have dropped by billions of dollars due to restatements of audited financial statements” (Levitt, 2000). However, there is also showing a similar phenomenon increasingly in t