Does securities enforcement improve disclosure quality? An examination of Chinese listed companies' restatement activities

Abstract

The present research enterprise addresses the efficacy of securities enforcement in China in relation to listed firms' restatement of annual reports. We conjecture that securities enforcement induces greater care and prudence in disclosure, thus lessening the prospect of subsequent restatement. The evidence in the present inquiry strongly supports this premise. Our focus is on informal enforcements. Significantly, SOEs are more responsive than non-SOEs in arresting reporting deficiencies. In contrast to a narrative of regulatory capture, SOE decision-makers' political connections cement, rather than deter, compliance with state-based enforcements. Additionally, the two mainland exchanges impart stronger effect on disclosure quality than either central or local security bureaus. In relation to governance, independent directors exert little to no effect on year-on-year changes in restatement activities. Overall, we report that Chinese regulatory enforcement has become increasingly effective in raising disclosure standards. We surmise that learning and resource-based effects underlie this outcome.