Player and Referee Roles Held Jointly: The Effect of State Ownership on China’s Regulatory Enforcement Against Fraud

30 Pages Posted: 29 Sep 2010 Last revised: 3 Jan 2012

See all articles by Wenxuan Hou

Wenxuan Hou

University of Edinburgh - Business School; University of Edinburgh - Business School; Shanghai Lixin University of Accounting and Finance

Geoff Moore

Durham Business School

Date Written: December 22, 2010

Abstract

This paper examines the impact of the prevailing state ownership in the Chinese stock market on corporate governance and the financial regulatory system respectively as the internal and external monitoring mechanisms to deter corporate fraud and protect investors. In line with the literature that state ownership exaggerates the agency problem, we find that the retained state ownership in privatised firms increases the incidence of regulatory enforcements against fraud. For the state-owned enterprises (SOEs), however, larger state ownership is associated with a lower incidence of enforcement actions. This is attributed to the mutual political affiliation of the fraudulent SOEs and the regulatory commission. A new regulation “Solutions for Listed Firm Checks” promulgated in March 2001 has mitigated this effect by empowering the regulatory commission to increase the severity of regulatory conditions. Our evidence confirms the improvement in the regulatory environment and investor protection in the Chinese stock market brought about by the regulatory reform and development.

Keywords: Fraud, Enforcement, Corporate Governance, Regulatory Commission, Shareholder Protection, China

JEL Classification: G30, G38

Suggested Citation

Hou, Wenxuan and Hou, Wenxuan and Moore, Geoff, Player and Referee Roles Held Jointly: The Effect of State Ownership on China’s Regulatory Enforcement Against Fraud (December 22, 2010). Journal of Business Ethics, Vol. 95, 2010, Available at SSRN: https://ssrn.com/abstract=1682054 or http://dx.doi.org/10.2139/ssrn.1682054

Wenxuan Hou (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

Shanghai Lixin University of Accounting and Finance ( email )

Geoff Moore

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom
+44 (0) 191 33 45549 (Phone)
+44 (0) 191 33 45201 (Fax)

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