Does the integration between litigation and supervision discipline financial misstatement?

This paper explores the positive governance effects of the Procuratorate’s Public Interest Litigation System in China, which combines the powers of litigation and administrative supervision, on the quality of information disclosure by listed state-owned enterprises. We report several findings. (1) The likelihood that listed state-owned enterprises would issue financial restatements and participate in financial fraud decreased significantly in areas selected for pilot implementation. (2) The governance effect is stronger in regulated industries than in unregulated industries. After the pilot implementation, the agency costs decreased, and the increase in legal litigation risks related to false statements faced by enterprises played a deterrent effect. (3) The significance of the above results is stronger when a company’s external and internal governance are weaker. This study provides both new evidence of the effectiveness of the integrated governance mechanism and inspiration for future efforts to widely implement this mechanism in the capital market.