A Study on the Governance of Corporate Fraud Behavior from a Trust Perspective: Evidence from China

Abstract

Based on the trust triangle theory, this paper examines the impact of formal institution (legal regulations and press coverage) and informal institution (religious beliefs, hometown relationship, and surname identity relationship) on the occurrence of financial reporting fraud by firms. Utilizing a sample of Chinese listed firms, we find that external formal institutions, such as legal regulation and media monitoring, and internal informal institutions, such as surname identity relationship and religious beliefs, significantly reduce the likelihood of firms committing financial fraud. Conversely, hometown relationship increases the likelihood of financial fraud. The results further indicate that different configurations of these mechanisms can either complement or substitute for each other to enhance the credibility of financial disclosures. Overall, an effective combination of these mechanisms is more effective than individual mechanisms in monitoring corporate financial fraud.

Keywords: Legal regulation, press coverage, religious belief, hometown relationship, surname identity relationship, financial fraud