Fraud, Market Reaction, and Role of Institutional Investors in Chinese Listed Firms

44 Pages Posted: 5 Jul 2013 Last revised: 26 Mar 2014

Reena Aggarwal

Georgetown University - Robert Emmett McDonough School of Business

May Hu

Deakin University

Jingjing Yang

Jiangxi Normal University

Date Written: March 25, 2014

Abstract

We examine the extent and 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 occurrences 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 are consistent with the hypothesis that ownership by independent

Keywords: Corporate Governance, Fraud, Institutional Investors, China

JEL Classification: G32, G34

Suggested Citation

Aggarwal, Reena and Hu, May and Yang, Jingjing, Fraud, Market Reaction, and Role of Institutional Investors in Chinese Listed Firms (March 25, 2014). Available at SSRN: https://ssrn.com/abstract=2289460 or http://dx.doi.org/10.2139/ssrn.2289460

Reena Aggarwal (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3784 (Phone)
202-687-0798 (Fax)

HOME PAGE: http://explore.georgetown.edu/people/aggarwal/

May Hu

Deakin University ( email )

Graduate School of Business
Melbourne, Victoria 3125
Australia

Jingjing Yang

Jiangxi Normal University ( email )

99 Ziyang Ave
Nanchang, Jiangxi
China

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