Institutional Investors, Political Connections, and the Incidence of Regulatory Enforcement Against Corporate Fraud

43 Pages Posted: 7 Oct 2014

See all articles by Wenfeng Wu

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Sofia Johan

Florida Atlantic University - Finance; Tilburg Law and Economics Center (TILEC)

Oliver M. Rui

China Europe International Business School (CEIBS)

Date Written: October 7, 2014

Abstract

We investigate two under-explored factors in mitigating the risk of corporate fraud and regulatory enforcement against fraud, namely institutional investors and political connections. The role of institutional investors in the effective monitoring of a firm’s management is well established in the literature. We further observe that firms that have a large proportion of their shares held by institutional investors have a lower incidence of enforcement actions against corporate fraud. The importance of political connections for enterprises, whether in a developed market such as the United States or an emerging market such as China, has been established by previous studies. However, we find evidence of another positive effect of political connections: they may reduce the incidence of enforcement action against corporate fraud. We also find that political connections play a more significant role in reducing regulatory enforcement incidents against non-state-owned enterprises and firms in weaker legal environments, whereas institutional ownership plays a more important role in reducing regulatory enforcement incidents against state-owned enterprises.

Keywords: Fraud; Political connections; Institutional investor; China

JEL Classification: G34

Suggested Citation

Wu, Wenfeng and Johan, Sofia A. and Rui, Oliver M., Institutional Investors, Political Connections, and the Incidence of Regulatory Enforcement Against Corporate Fraud (October 7, 2014). Available at SSRN: https://ssrn.com/abstract=2506424 or http://dx.doi.org/10.2139/ssrn.2506424

Wenfeng Wu

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

No. 535 Fahuazhen Road
Shanghai, Shanghai 200052
China

Sofia A. Johan

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Oliver M. Rui (Contact Author)

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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