Equity Incentives and Corporate Fraud in China

47 Pages Posted: 14 Jul 2015

See all articles by Lars Helge Hass

Lars Helge Hass

Lancaster University - Management School

Monika Tarsalewska

University of Exeter Business School

Feng Zhan

John Carroll University - Boler School of Business

Date Written: February 28, 2015

Abstract

This paper explores how managers’ and supervisors’ equity incentives impact the likelihood of committing corporate fraud in Chinese-listed firms. Previous research has shown that corporate fraud in China is a widespread phenomenon and has severe consequences for affected firms and executives. However, our understanding of the reasons fraud is committed in a Chinese setting have been very limited thus far. This is an increasingly important topic, because corporate governance is rapidly changing in China, and it is unclear whether adopting the executive compensation practices of the West is appropriate for Chinese firms. We show that managers’ equity incentives increase their propensity to commit corporate fraud. We also find that this effect is more pronounced for state-owned firms. However, we find a negative but not significant relationship between the equity incentives of the supervisory board and the incidence of fraud.

Keywords: Equity Incentives, Corporate Fraud, Corporate Governance, Ownership Structure, Chinese Economy

JEL Classification: G30, G32, O53

Suggested Citation

Hass, Lars Helge and Tarsalewska, Monika and Zhan, Feng, Equity Incentives and Corporate Fraud in China (February 28, 2015). Journal of Business Ethics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2629777

Lars Helge Hass (Contact Author)

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Monika Tarsalewska

University of Exeter Business School ( email )

XFI building, Streatham Campus
Rennes Drive
Exeter, Devon EX4 4ST
United Kingdom

Feng Zhan

John Carroll University - Boler School of Business ( email )

University Heights, OH 44118-4581
United States

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