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Institutional Investors, Political Connections and Incidence of Corporate Fraud

36 Pages Posted: 29 Nov 2012  

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Sofia Johan

York University - Schulich School of Business; Tilburg Law and Economics Center (TILEC)

Oliver M. Rui

China Europe International Business School (CEIBS)

Date Written: November 28, 2012

Abstract

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.

Keywords: Fraud, Political connection, Institutional investor, China

JEL Classification: G15, G18, K22

Suggested Citation

Wu, Wenfeng and Johan, Sofia and Rui, Oliver M., Institutional Investors, Political Connections and Incidence of Corporate Fraud (November 28, 2012). TILEC Discussion Paper No. 2012-042. Available at SSRN: https://ssrn.com/abstract=2181958 or http://dx.doi.org/10.2139/ssrn.2181958

Wenfeng Wu (Contact Author)

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 535 Fahuazhen Road
Shanghai, Shanghai 200052
China

Sofia A. Johan

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Oliver M. Rui

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

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