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 - Lancaster University Management School; University of Iowa - Henry B. Tippie College of Business

Monika Tarsalewska

University of Exeter Business School

Feng Zhan

University of Western Ontario

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 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 - Lancaster University Management School ( email )

Department of Accounting and Finance
Lancaster, LA1 4YX
United Kingdom

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States

Monika Tarsalewska

University of Exeter Business School ( email )

Streatham Court, Streatham Campus,
Rennes Drive
Exeter, Devon EX4 4PU
United Kingdom

Feng Zhan

University of Western Ontario ( email )

1151 Richmond Street
London, Ontario N6A 5B8
Canada

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