Fraud, Market Reaction, and Role of Institutional Investors in Chinese Listed Firms
Georgetown University - Robert Emmett McDonough School of Business
Graduate School of Business; Deakin University
Jiangxi Normal University
July 3, 2013
We examine the extent of fraud and the type of financial fraud committed by listed firms in China, stock market reaction to the detection and announcement of fraud, the characteristics of firms committing fraud, and the association between institutional ownership and financial fraud. One of our objectives is to study the monitoring role of different types of institutional investors, such as mutual funds, pension funds and insurance companies. Using fraud data from the Chinese Securities Regulatory Commission between 2001 and 2011, we find wide occurrence of fraud, and a strong negative market reaction on the announcement date, particularly in cases of serious fraud. Fraud is more likely to take place at firms that have a smaller proportion of independent directors, and at poorly performing firms. We find firms with higher mutual fund ownership subsequently have fewer incidences of fraud. We do not find any association between ownership by grey financial institutions, such as insurance companies and pension funds that are likely to have business ties with firms, and future corporate fraud. Our results show that ownership by independent institutions, such as mutual funds, enhances corporate governance in Chinese capital markets, and serves as an effective monitoring mechanism.
Number of Pages in PDF File: 41
Keywords: Corporate Governance, Fraud, Institutional Investors, China
JEL Classification: G32, G34working papers series
Date posted: July 5, 2013
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