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

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.