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Cautious and conscientious or fish in troubled waters: Knightian uncertainty and financial restatement

Author

Listed:
  • Ma, Tingting
  • Niu, Duo
  • Fang, Xizhe
  • Ji, Xinyuan
  • Sensoy, Ahmet

Abstract

Recently, the Knightian uncertainty triggered by frequent extreme events has exerted profound and lasting impacts on capital markets. This paper investigates the effect of Knightian uncertainty on corporate financial restatements, using data from Chinese A-share listed firms between 2007 and 2020. The findings show that Knightian uncertainty significantly increases the likelihood of financial restatements. Mechanism analysis indicates that addressing the capital market pressure induced by Knightian uncertainty is a key motivation for firms to engage in financial restatements. Heightened uncertainty also exacerbates information asymmetry and earnings management, with firms displaying opportunistic “fishing in muddy waters” behavior. Heterogeneity analysis highlights varying effects across firms with different characteristics and governance structures. This research enhances understanding of how Knightian uncertainty shapes corporate information environments and offers policy insights for stabilizing capital markets.

Suggested Citation

  • Ma, Tingting & Niu, Duo & Fang, Xizhe & Ji, Xinyuan & Sensoy, Ahmet, 2025. "Cautious and conscientious or fish in troubled waters: Knightian uncertainty and financial restatement," Research in International Business and Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:riibaf:v:80:y:2025:i:c:s0275531925003915
    DOI: 10.1016/j.ribaf.2025.103135
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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