Institutional Investors, Political Connections and Incidence of Corporate Fraud
Shanghai Jiao Tong University - Antai College of Economics & Management
York University - Schulich School of Business; Tilburg Law and Economics Center (TILEC)
Oliver M. Rui
China Europe International Business School (CEIBS)
November 28, 2012
TILEC Discussion Paper No. 2012-042
In this study, we analyze two new potential determinants for mitigating fraud committed by firms: institutional investors and political connection. The role of institutional investors in the effective monitoring of firm management has also been well established and we in turn observe that firms with a large proportion of institutional investors have lower incidences of corporate fraud. The importance of political connection for enterprise in both developed and emerging markets such as the United States and China has also been established by prior studies. We find in this paper that it is possible to identify another positive effect on enterprise in that political connection could reduce incidences of corporate fraud, thus providing value to firms. We further find that political connection plays more pronounced role in reducing the incidence of regulatory enforcement against non-state owned enterprises in weaker legal environments, while institutional ownership plays a more important role in reducing the incidence of regulatory enforcement against state owned enterprises in weaker legal environments.
Number of Pages in PDF File: 36
Keywords: Fraud, Political connection, Institutional investor, China
JEL Classification: G15, G18, K22
Date posted: November 29, 2012
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