Title

Cooking the books : recipes and costs of falsified financial statements in China

Document Type

Journal article

Source Publication

Journal of Corporate Finance

Publication Date

4-1-2011

Volume

17

Issue

2

First Page

371

Last Page

390

Keywords

Fraud, Financial restatements, Regional development, Corporate governance, Causes and consequences of restatements

Abstract

We examine the causes and consequences of falsified financial statements in China. Using bivariate probit regression analysis, we find that firms with high debt and that plan to make equity issues are more likely to manipulate their earnings and thus have to restate their financial reports in subsequent years. We also find that corporate governance structures have an effect on the occurrence and detection of financial fraud. There are significant negative consequences to fraudulent financial statements. Restating firms suffer negative abnormal stock returns, increases in their cost of capital, wider bid-ask spreads, a greater frequency of modified audit opinions, and greater CEO turnover. We also find that firms located in highly developed regions suffer more severe consequences when they manipulate their accounts.

DOI

10.1016/j.jcorpfin.2010.09.002

Print ISSN

09291199

E-ISSN

18726313

Publisher Statement

Copyright © 2010 Elsevier B.V.

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Full-text Version

Publisher’s Version

Recommended Citation

Firth, M., Rui, O. M., & Wu, W. (2011). Cooking the books: Recipes and costs of falsified financial statements in China. Journal of Corporate Finance, 17(2), 371-390. doi: 10.1016/j.jcorpfin.2010.09.002