Advertisement

Journal of Business Ethics

, Volume 148, Issue 2, pp 375–396 | Cite as

Public Governance and Corporate Fraud: Evidence from the Recent Anti-corruption Campaign in China

  • Jian Zhang
Article

Abstract

Taking advantage of the China’s recent anti-corruption campaign, we attempt to examine the effect of public governance on a firm’s incentive to commit fraud. Using enforcement actions data from the Chinese Securities Regulatory Commission (CSRC) from 2004 to 2014, we find that, due to enhanced public governance, firms are less likely to commit fraud in the post-campaign period than in the pre-campaign period. We further show that the effect of public governance is more evident in privately held listed firms, in firms with weak legal environment, and in firms in areas with poor local economies. In addition, we find that older CEOs respond less actively to the public governance caused by anti-corruption regulations. This paper offers clear policy implications for business ethics by indicating that public governance provides external monitoring of corporate decisions.

Keywords

Corporate fraud Anti-corruption Chinese government Public governance 

JEL Classification

G34 

References

  1. Acemoglu, D., & Verdier, T. (2000). The choice between market failures and corruption. American Economic Review, 90, 194–211.CrossRefGoogle Scholar
  2. Ackerman, S. R. (1978). Corruption: A study in political economy. New York: Academic Press.Google Scholar
  3. Aggarwal, R. K., Meschke, F., & Wang, T. Y. (2012). Corporate political donations: Investment or agency? Business and Politics 14.Google Scholar
  4. Agrawal, A., & Chadha, S. (2005). Corporate governance and accounting scandals. Journal of Law and Economics, 48, 371–406.CrossRefGoogle Scholar
  5. Agrawal, A., & Knoeber, C. R. (2001). Do some outside directors play a political role? Journal of Law and Economics, 44, 179–198.CrossRefGoogle Scholar
  6. Aidt, T. S. (2009). Corruption, institutions, and economic development. Oxford Review of Economic Policy, 25, 271–291.CrossRefGoogle Scholar
  7. Alexander, C. R., & Cohen, M. A. (1999). Why do corporations become criminals? Ownership, hidden actions, and crime as an agency cost. Journal of Corporate Finance, 5, 1–34.CrossRefGoogle Scholar
  8. Allen, F., Qian, J., & Qian, M. (2005). Law, finance, and economic growth in China. Journal of Financial Economics, 77, 57–116.CrossRefGoogle Scholar
  9. Arlen, J. H., & Carney, W. J. (1992). Vicarious liability for fraud on securities markets: Theory and evidence. U. Ill. L. Rev. Google Scholar
  10. Beasley, M. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review, 71, 443–465.Google Scholar
  11. Beck, T., & Levine, R. (2002). Industry growth and capital allocation: Does having a market- or bank-based system matter? Journal of Financial Economics, 64, 147–180.CrossRefGoogle Scholar
  12. Becker, G. S. (1968). Crime and punishment: An economic approach. The Journal of Political Economy, 76, 169–217.CrossRefGoogle Scholar
  13. Bergstresser, D. B., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 66, 511–529.CrossRefGoogle Scholar
  14. Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital structures in developing countries. Journal of Finance, 56, 87–130.CrossRefGoogle Scholar
  15. Brickley, J. A., Coles, J. L., & Jarrell, G. (1997). Leadership structure: Separating the CEO and chairman of the board. Journal of Corporate Finance, 3, 189–220.CrossRefGoogle Scholar
  16. Burns, N., & Kedia, S. (2006). The impact of performance-based compensation on misreporting. Journal of Financial Economics, 79, 35–67.CrossRefGoogle Scholar
  17. Cai, H., Fang, H., & Xu, L. C. (2011). Eat, drink, firms, government: An investigation of corruption from the entertainment and travel costs of Chinese firms. Journal of Law and Economics, 54, 55–78.CrossRefGoogle Scholar
  18. Chen, G., Firth, M., Gao, D., & Rui, Z. (2006). Ownership structure, corporate governance, and fraud: Evidence from China. Journal of Corporate Finance, 12, 424–448.CrossRefGoogle Scholar
  19. Chen, G., Michael, F., & Lixin, X. (2009). Does the type of ownership control matter? Evidence from China’s listed companies. Journal of Banking & Finance, 33, 171–181.CrossRefGoogle Scholar
  20. Chidambaran, N. K., Kedia, S., & Prabhala, N. R. (2011). CEO director connections and corporate fraud. Fordham University Schools of Business Research Paper 1787500.Google Scholar
  21. Claessens, S., & Burcin Yurtoglu, B. (2013). Corporate governance in emerging markets: A survey. Emerging markets review, 15, 1–33.CrossRefGoogle Scholar
  22. Cornett, M. M., Marcus, A. J., & Tehranian, H. (2008). Corporate governance and pay-for-performance: The impact of earnings management. Journal of Financial Economics, 87, 357–373.CrossRefGoogle Scholar
  23. Cox, J. D., Thomas, R. S., & Kiku, D. (2003). SEC enforcement heuristics: An empirical inquiry. Duke Law Journal, 53, 737–779.Google Scholar
  24. Crutchley, C. E., Jensen, M. R., & Marshall, B. B. (2007). Climate for scandal: corporate environments that contribute to accounting fraud. Financial Review, 42, 53–73.CrossRefGoogle Scholar
  25. Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting material accounting misstatements. Contemporary Accounting Research, 28, 17–82.CrossRefGoogle Scholar
  26. Dechow, P., Sloan, R. G., & Sweeney, A. (1996). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research, 13, 1–36.CrossRefGoogle Scholar
  27. Demirgüç-Kunt, A., & Maksimovic, V. (1998). Law, finance, and firm growth. Journal of Finance, 53, 2107–2137.CrossRefGoogle Scholar
  28. Demirgüç-Kunt, A., & Maksimovic, V. (1999). Institutions, financial markets, and firm debt maturity. Journal of Financial Economics, 54, 295–336.CrossRefGoogle Scholar
  29. Doidge, C., Andrew Karolyi, G., & Stulz, R. M. (2004). Why are foreign firms listed in the US worth more? Journal of Financial Economics, 71, 205–238.CrossRefGoogle Scholar
  30. Doidge, C., Andrew Karolyi, G., & Stulz, R. M. (2007). Why do countries matter so much for corporate governance? Journal of Financial Economics, 86, 1–39.CrossRefGoogle Scholar
  31. Donaldson, G., & Lorsch, J. W. (1983). Decision making at the top: The shaping of strategic direction. New York: Basic Books.Google Scholar
  32. Dong, B., & Torgler, B. (2013). Causes of corruption: Evidence from China. China Economic Review, 26, 152–169.CrossRefGoogle Scholar
  33. Dyck, A., Morse, A., & Zingales, L. (2010). Who blows the whistle on corporate fraud? Journal of Finance, 65, 2213–2253.CrossRefGoogle Scholar
  34. Efendi, J., Srivastava, A., & Swanson, E. P. (2007). Why do corporate managers misstate financial statements? The role of option compensation and other factors. Journal of Financial Economics, 85, 667–708.CrossRefGoogle Scholar
  35. Ehrlich, I., & Lui, F. T. (1999). Bureaucratic corruption and endogenous economic growth. Journal of Political Economy, 107, S270–S293.CrossRefGoogle Scholar
  36. Faccio, M. (2006). Politically connected firms. The American Economic Review, 96, 369–386.CrossRefGoogle Scholar
  37. Faccio, M., Masulis, R. W., & McConnell, J. J. (2006). Political connections and corporate bailouts. Journal of Finance, 61, 2597–2635.CrossRefGoogle Scholar
  38. Faccio, M., & Parsley, D. C. (2009). Sudden deaths: Taking stock of political connections. Journal of Financial and Quantitative Analysis, 44, 683–718.CrossRefGoogle Scholar
  39. Fan, C. S., Lin, C., & Treisman, D. (2009). Political decentralization and corruption: Evidence from around the world. Journal of Public Economics, 93, 14–34.CrossRefGoogle Scholar
  40. Fan, J. P., Rui, O. M., & Zhao, M. (2008). Public governance and corporate finance: Evidence from corruption cases. Journal of Comparative Economics, 36, 343–364.CrossRefGoogle Scholar
  41. Fan, J. P., Titman, S., & Twite, G. (2012). An international comparison of capital structure and debt maturity choices. Journal of Financial and Quantitative Analysis, 47, 23–56.CrossRefGoogle Scholar
  42. Fan, Joseph P. H., Wong, T. J., & Zhang, T. (2007). Politically-connected CEOs, corporate governance and post-IPO performance of China’s partially privatized firms. Journal of Financial Economics, 84, 330–357.CrossRefGoogle Scholar
  43. Fan, W., Wang, X., & Zhu, H. (2011). Neri index of marketization of China Provinces. Beijing: National Economic Research Institute.Google Scholar
  44. Feng, M., Ge, W., Luo, S., & Shevlin, T. (2011). Why do CFOs become involved in material accounting manipulations? Journal of Accounting and Economics, 51, 21–36.CrossRefGoogle Scholar
  45. Fisman, R., & Miguel, E. (2007). Corruption, norms, and legal enforcement: Evidence from diplomatic parking tickets. Journal of Political Economy, 115, 1020–1048.CrossRefGoogle Scholar
  46. Giannetti, M. (2003). Do better institutions mitigate agency problems? Evidence from corporate finance choices. Journal of Financial and Quantitative Analysis, 38, 185–212.CrossRefGoogle Scholar
  47. Gintis, H. (2003). The hitchhiker’s guide to altruism: Gene-culture coevolution, and the internalization of norms. Journal of Theoretical Biology, 220, 407–418.CrossRefGoogle Scholar
  48. Glaeser, E. L., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2004). Do institutions cause growth? Journal of Economic Growth, 9, 271–303.CrossRefGoogle Scholar
  49. Glaeser, E. L., & Saks, R. E. (2006). Corruption in America. Journal of Public Economics, 90, 1053–1072.CrossRefGoogle Scholar
  50. Gupta, S., & Swenson, C. W. (2003). Rent-seeking by agents of the firm. Journal of Law and Economics, 46, 253–268.CrossRefGoogle Scholar
  51. Hackman, R. J. (1992). Group influences on individuals in organizations. Handbook of Industrial and Organizational Psychology (2nd ed., Vol. 3). Palo Alto, CA: Consulting Psychologists Press.Google Scholar
  52. Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13, 365–383.CrossRefGoogle Scholar
  53. Jayachandran, S. (2006). The Jeffords effect. Journal of Law and Economics, 49, 397–425.CrossRefGoogle Scholar
  54. Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323–329.Google Scholar
  55. Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48, 831–880.CrossRefGoogle Scholar
  56. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.CrossRefGoogle Scholar
  57. Jian, M., & Wong, T. J. (2010). Propping through related party transactions. Review of Accounting Studies, 15, 70–105.CrossRefGoogle Scholar
  58. Johnson, S. A., Ryan, H. E., & Tian, Y. S. (2009). Managerial incentives and corporate fraud: The sources of incentives matter. Review of Finance, 13, 115–145.CrossRefGoogle Scholar
  59. Karpoff, J. M., & Lou, X. (2010). Short sellers and financial misconduct. The Journal of Finance, 65, 1879–1913.CrossRefGoogle Scholar
  60. Karpoff, J. M., Scott Lee, D., & Martin, G. S. (2008a). The cost to firms of cooking the books. Journal of Financial and Quantitative Analysis, 43, 581–611.CrossRefGoogle Scholar
  61. Karpoff, J. M., Scott Lee, D., & Martin, G. S. (2008b). The consequences to managers for financial misrepresentation. Journal of Financial Economics, 88, 193–215.CrossRefGoogle Scholar
  62. Karpoff, J., Scott Lee, D., & Vendrzyk, V. P. (1999). Defense procurement fraud, penalties, and contractor influence. Journal of Political Economy, 107, 809–842.CrossRefGoogle Scholar
  63. Kedia, S., & Rajgopal, S. (2011). Do the SEC’s enforcement preferences affect corporate misconduct? Journal of Accounting and Economics, 51, 259–278.CrossRefGoogle Scholar
  64. Khanna, V., Kim, E., & Lu, Y. (2015). CEO connectedness and corporate fraud. The Journal of Finance, 70, 1203–1252.CrossRefGoogle Scholar
  65. Kimbro, M. B. (2002). A cross-country empirical investigation of corruption and its relationship to economic, cultural, and monitoring institutions: An examination of the role of accounting and financial statements quality. Journal of Accounting, Auditing & Finance, 17, 325–350.CrossRefGoogle Scholar
  66. Kotter, J. P., & Heskett, J. L. (1992). Corporate culture and performance. New York: Free Press.Google Scholar
  67. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997a). Legal determinants of external finance. Journal of Finance, 52, 1131–1150.CrossRefGoogle Scholar
  68. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997b). Trust in large organizations. American Economic Review, 87, 333–338.Google Scholar
  69. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 106, 1113–1155.CrossRefGoogle Scholar
  70. La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (1999a). Corporate ownership around the world. Journal of Finance, 54, 471–517.CrossRefGoogle Scholar
  71. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1999b). The quality of government. Journal of Law Economics and Organization, 15, 222–279.CrossRefGoogle Scholar
  72. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000a). Investor protection and corporate governance. Journal of Financial Economics, 58, 141–186.CrossRefGoogle Scholar
  73. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000b). Agency problems and dividend policy around the world. Journal of Finance, 55, 1–34.CrossRefGoogle Scholar
  74. Leuz, C., & Oberholzer-Gee, F. (2006). Political relationships, global financing, and corporate transparency: Evidence from Indonesia. Journal of Financial Economics, 81, 411–439.CrossRefGoogle Scholar
  75. Levine, R. (1999). Law, finance, and economic growth. Journal of Financial Intermediation, 8, 8–35.CrossRefGoogle Scholar
  76. Li, M., Makaew, T., & Winton, A. (2014). Cheating in China: Corporate fraud and the roles of financial markets. Available at SSRN 2521151.Google Scholar
  77. Li, K., Wang, T., Cheung, Y.-L., & Jiang, P. (2011). Privatization and risk sharing: Evidence from the split share structure reform in China. Review of Financial Studies, 24, 2499–2525.CrossRefGoogle Scholar
  78. Lipset, S. (1960). Political man: The social bases of politics. Garden City, NY: Doubleday.Google Scholar
  79. Liu, X. (2014). Corruption Culture and Corporate Misconduct. Available at http://www.cicfconf.org/sites/default/files/paper_965.pdf.
  80. Lui, F. T. (1985). An equilibrium queuing model of bribery. The Journal of Political Economy, 93, 760–781.CrossRefGoogle Scholar
  81. Lui, F. T. (1986). A dynamic model of corruption deterrence. Journal of Public Economics, 31, 215–236.CrossRefGoogle Scholar
  82. Mauro, P. (1995). Corruption and growth. The Quarterly Journal of Economics, 110, 681–712.CrossRefGoogle Scholar
  83. Mo, P. H. (2001). Corruption and economic growth. Journal of Comparative Economics, 29, 66–79.CrossRefGoogle Scholar
  84. Ng, D. (2006). The impact of corruption on financial markets. Managerial Finance, 32, 822–836.CrossRefGoogle Scholar
  85. Ng, D., & Qian, K. (2004). Corruption and corporate governance, mimeo. Ithaca, NY: Cornell University.Google Scholar
  86. North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  87. Parsons, C. A., Sulaeman, J., & Titman, S. (2014). Peer Effects and corporate corruption. Working Paper.Google Scholar
  88. Peng, L., & Röell, A. (2008). Executive pay and shareholder litigation. Review of Finance, 12, 141–184.CrossRefGoogle Scholar
  89. Poirier, D. J. (1980). Partial observability in bivariate probit models. Journal of Econometrics, 12, 209–217.CrossRefGoogle Scholar
  90. Prendergast, C., & Stole, L. (1996). Impetuous youngsters and jaded old-timers: Acquiring a reputation for learning. Journal of Political Economy, 104, 1105–1134.CrossRefGoogle Scholar
  91. Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50, 1421–1460.CrossRefGoogle Scholar
  92. Reinikka, R., & Svensson, J. (2004). Local capture: evidence from a central government transfer program in Uganda. The Quarterly Journal of Economics, 119, 679–705.CrossRefGoogle Scholar
  93. Schein, E. H. (1985). Organizational culture and leadership. San Francisco: Jossey-Bass.Google Scholar
  94. Serfling, M. A. (2014). CEO age and the riskiness of corporate policies. Journal of Corporate Finance, 25, 251–273.CrossRefGoogle Scholar
  95. Serra, D. (2006). Empirical determinants of corruption: A sensitivity analysis. Public Choice, 126, 225–256.CrossRefGoogle Scholar
  96. Shleifer, A., & Vishny, R. W. (1989). Management entrenchment: The case of manager-specific investments. Journal of Financial Economics, 25, 123–139.CrossRefGoogle Scholar
  97. Shleifer, A., & Vishny, R. (1993). Corruption. Quarterly Journal of Economics, 108, 599–617.CrossRefGoogle Scholar
  98. Shleifer, A., & Vishny, R. W. (1994). Politicians and firms. The Quarterly Journal of Economics, 109, 995–1025.CrossRefGoogle Scholar
  99. Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52, 737–783.CrossRefGoogle Scholar
  100. Svensson, J. (2003). Who must pay bribes and how much? Evidence from a cross section of firms. The Quarterly Journal of Economics, 118, 207–230.CrossRefGoogle Scholar
  101. Wang, T. Y. (2011). Corporate securities fraud: Insights from a new empirical framework. Journal of Law Economics and Organization, 31, 1–34.Google Scholar
  102. Wang, Tracy Yue. (2013). Corporate securities fraud: Insights from a new empirical framework. Journal of Law, Economics, and Organization, 29(3), 535–568.CrossRefGoogle Scholar
  103. Wang, T. Y., & Winton, A. (2014). Product market interactions and corporate fraud. Available at SSRN 2398035.Google Scholar
  104. Wang, T. Y., Winton, A., & Xiaoyun, Yu. (2010). Corporate fraud and business conditions: Evidence from IPOs. Journal of Finance, 65, 2255–2292.CrossRefGoogle Scholar
  105. Wei, S. (2000). How taxing is corruption on international investors? Review of Economics and Statistics, 82, 1–11.CrossRefGoogle Scholar
  106. Wu, X. (2008). Public sector transparency and corporate accounting practices in Asia. Available at SSRN: http://ssrn.com/abstract=1404016.
  107. Wu, Wenfeng, Johan, Sofia A., & Rui, Oliver M. (2014). Institutional investors, political connections, and the incidence of regulatory enforcement against corporate fraud. Journal of Business Ethics,. doi: 10.1007/s10551-014-2392-4.Google Scholar
  108. Xie, P., & Lu, L. (2003). Unwilling bribery and collusion. Journal of Financial Research, 277, 1–15. (in Chinese).Google Scholar
  109. Yu, F. F. (2008). Analyst coverage and earnings management. Journal of Financial Economics, 88, 245–271.CrossRefGoogle Scholar
  110. Yu, F., & Xiaoyun, Yu. (2012). Corporate lobbying and fraud detection. Journal of Financial and Quantitative Analysis, 46, 1865–1891.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  1. 1.School of FinanceSouthwestern University of Finance and EconomicsChengduChina

Personalised recommendations