The Role of Mutual Funds in Deterring Corporate Fraud in China

ENTREPRENEURSHIP, GOVERNANCE AND ETHICS, Cumming, D., C., Mallin and R., Cressy, eds., Springer, Forthcoming

27 Pages Posted: 3 Jan 2012 Last revised: 23 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

Edward Lee

University of Manchester - Alliance Manchester Business School

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Date Written: September 20, 2011

Abstract

Since the 1990s there has been a surge in the mutual fund industry across the world. Mutual funds offer individual investors both the diversification of investment risk and the expertise to monitor corporate decisions. We find the effect of mutual fund ownership in reducing corporate fraud activities among listed firms in China. This confirms that fund managers utilize share prices to discipline firms for misdemeanors. Additional tests reveal that open-end funds reduce their ownership after firms are penalized by the regulatory authorities for corporate fraud. We also observe that this effect is more pronounced among non-state-owned enterprises (NSOEs) than state-owned enterprises (SOEs). This implies the negative side of the government support to SOEs. Since state-controlled listed firms receive government financial support, they are less dependent on the capital market and therefore more insulated from monitoring by external stakeholders. Thus, although managerial political connections could benefit firms in a transitional economy, they incur agency costs for minority shareholders.

Keywords: Fund, Fund Ownership, Fraud, Integrity, Ethics, China

JEL Classification: G15, G30, K22, M41

Suggested Citation

Hou, Wenxuan and Hou, Wenxuan and Lee, Edward and Stathopoulos, Konstantinos, The Role of Mutual Funds in Deterring Corporate Fraud in China (September 20, 2011). ENTREPRENEURSHIP, GOVERNANCE AND ETHICS, Cumming, D., C., Mallin and R., Cressy, eds., Springer, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1978573 or http://dx.doi.org/10.2139/ssrn.1978573

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 )

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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