Financial Restatements, Investors Protection And The Market Reaction

Essentially ,a capital market is an information market in which investors make decisions according to the information disclosed by listed companies.Their financial reports are the most inportant information which help investors understand the companies'financial state and operating results. Securities Law, Company Law, Provisional Regulations on Stock Issuance and Transaction Management, Regulations on Information Disclosure of Public-Offering Company and Rules on Information Disclosure of Public Security-offering Company make the norm on information disclosure of listed companies to protect investors. But in recent years the behavior of finanncial restatements appears frequently. Statistically, annual finanncial restatements increased from 21 in 1999 to 269 in 2009, among which there are a number of listed companies publishing several restatements in a year . These kinds of phenomena may be due to listed companies'special purpose (such as share placements, issuance) . In order to achieve the purpose,they announced the financial reports which has been controlled, then restated after realization .For these kinds of phenomena, this paper studies the relationship between the market reaction of financial restatements and investors protection. And it helps to have a more thorough understandingof financial restatements.Financial restatements refers to the listed companies correcting mistakes of previous financial report and publishing it on their own initiative or at the request of regulatory authorities.From the point of view of investors protection, kinds of problems existing in information disclosure such as financial restatements can be attributed to imperfect investor protection system . When analyzing the different market reaction on financial restatements of different companies ,this paper considers the investors protection of different areas which listed companies are located in .It also expects to explore a more reasonable and effective investors protection system, and to safeguard the securities market .Combined with normative study and empirical sutdy, this paper briefly describes the background and significance of this topic, method and framework. Then, it makes a summarization of the realtionship between market reaction on the listed companies'financial restatements and the investors protection sysytem ,followed by a list of financial restatements.In empirical reaearch , in order to study the market reaction on listed companies'financial restatements , this paper uses the event study method and collects data of 479 listed companies and their paired samples which listing on the Shanghai and Shenzhen Stock Exchange from 2007 to 2009. In a multivariate regression model , the cumulative abnormal return is a dependent variable, and financial restatements and the investor protection of different areas which listed companies are located in are independent variables. There are the following conclusions: 1 The behavior of listed companies'financial restatements have a negative impact on the stock market significantly.For the financial restatements have conveyed some information, investors will adjust their investment decision after concerning the restatements . 2 Compared with the areas of higher investor protection , the stock market will reflect more negative reaction on financial restatements of listed companies which are lacated in lower investor protection.The emergence of financial restatements means the failure of China's securities monitoring system . Information disclosure in stock market hasn't been standardized, and investors'interests hasn't been protected effectively. The value of this paper is to remind investors to care about the restatement announcements of listed companies, the true meaning and their motivation .Both regulators and CPA should be actively concerned about the occurrence of listed companies'financial restatements, and supervise them to improve the quality of financial reports. Some retrospective accounting errors require reasonable disclosure rather than using them for earnings manipulation. And investors should pay more attention to the restatements of listed companies . Correctly understanding financial reports helps to find out the company's operating results and financial position, and further to improve their investment decisions.There are the innovations in this paper: 1 Based on the previous studies, the phenomena of financial restatments can be divided into the restatements before the annual financial disclosure and the restatements after the annual financial disclosure from the perspective of disclure time . 2 When studying the relationship between the market reaction of financial restatements and investor protection ,this paper also considers the investors protection of different areas which listed companies are located in .