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Is There Penalty for Crime: Corporate Scandal and Management Turnover in China

Peng Sun

Peking University

Yi Zhang

Peking University

June 3, 2006

EFA 2006 Zurich Meetings Paper

Corporate fraud scandals have plagued the emerging markets such as China. This paper studies the cost to Chinese firms and their management for committing fraud. We find that the enforcement actions on firms with violation of securities laws from the regulation authorities are not severe. The stock price reactions to revelation of scandals are negative and statistically significant. We particularly examine the management turnover associated with the scandals. We find that fraud firms have higher management turnover than the matching non-fraud firms. However, we track down where the Chairman and CEO land after the turnover, and find a large portion of those leaving the fraud firms move to management positions in other firms and many of them actually even get promotion. Only a very small portion of CEOs and Chairmen receive legal or administrative penalty. We further find that Chairman and CEO with certain political background are less likely to receive legal or administrative penalties. We argue that the low effectiveness of law and lack of reputation mechanism on managerial labor market leads to the rampancy of corporate frauds and stagnancy of stock market development in China. Our findings provide direct evidence that legal system affects the stock market development.

Number of Pages in PDF File: 56

Keywords: Corporate fraud, management turnover, penalty, law, China

JEL Classification: G30, K22, M51

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Date posted: March 15, 2006  

Suggested Citation

Sun, Peng and Zhang, Yi, Is There Penalty for Crime: Corporate Scandal and Management Turnover in China (June 3, 2006). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891096 or http://dx.doi.org/10.2139/ssrn.891096

Contact Information

Peng Sun
Peking University ( email )
Peking University
Beijing, Beijing 100871
8610-62757895 (Phone)
8610-62751463 (Fax)
Yi Zhang (Contact Author)
Peking University ( email )
Beijing, 100871
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