Are Geographical Dispersion and Institutional Dispersion Related to Accounting Misstatements?

Abstract

We examine the relation between geographical and institutional dispersion and accounting misstatements in China. We hypothesize that geographical dispersion is positively associated with the likelihood of accounting misstatements in subsidiary firms because of increasing monitoring cost and find evidence consistent with this prediction. We also focus on institutional dispersion because institutional duality may affect an organization’s behavior, but do not find that institutional dispersion is associated with accounting misstatements in subsidiary firms. Next, we find that geographical dispersion and institutional dispersion are negatively associated with misstatements in parent firms’ financial statements, consistent with the investor recognition argument. Lastly, we find that the negative (positive) relation between dispersion and parent-level (subsidiary-level) misstatements is more pronounced for state-owned firms and for firms with a wider (narrower) control-ownership wedge.