Law, Corporate Governance, and Corporate Scandal in an Emerging Economy: Insights from China

Zhang, Yi

doi:10.2139/ssrn.957549

Cited by 14 publications

(11 citation statements)

References 18 publications

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“…Zhang (2007), for example, finds that financial fraud was detected in onesixth of Chinese publicly traded firms from 1993 to 2004. Ding et al (2010) similarly note that corporate fraud is severe in China because of the relative infancy of Chinese capital markets and the difficulties in implementing binding legal structures over such a short period of time.…”

Section: Introductionmentioning

confidence: 99%

Executive Compensation and Corporate Fraud in China

Conyon

2014

J Bus Ethics

172

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This study investigates the relation between CEO compensation and corporate fraud in China. We document a significantly negative correlation between CEO compensation and corporate fraud using data on publicly traded firms between 2005 and 2010. Our findings are consistent with the hypothesis that firms penalize CEOs for fraud by lowering their pay. We also find that CEO compensation is lower in firms that commit more severe frauds. Panel data fixed effects and propensity score methods are used to demonstrate these effects. Our results also indicate that corporate governance mechanisms influence the magnitude of punishment. We find that CEOs of privately controlled firms, firms that split the posts of CEO and chairman, and CEOs of firms located in developed regions suffer larger compensation penalties for committing financial fraud. Finally, we show that CEOs at firms that commit fraud are more likely to be replaced compared to those at non-fraud firms.

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Section: Introductionmentioning

confidence: 99%

Executive Compensation and Corporate Fraud in China

Conyon

2014

J Bus Ethics

172

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“…For example, Liu and Lu (2007) find that independent boards discipline listed firms and help restrict firms' incentives for earnings management. In contrast, Zhang (2006) finds that board independence is not related to the probability that a firm will commit fraud. We surmise that the effectiveness of legal enforcement may play a key role in the difference.…”

Section: Resultsmentioning

confidence: 95%

Non‐Tradable Share Reform and Corporate Governance in the Chinese Stock Market

Yeh

Shu

Lee

et al. 2009

Corporate Governance

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Manuscript Type: EmpiricalResearch Question/Issue: Prior to China's split-share structure reform, domestic A shares were divided into non-tradable and tradable shares. Non-tradable shareholders represent the government, hold roughly a two-thirds majority, and manage the firms, while tradable shareholders have little power to affect the decisions made by non-tradable shareholders. This is a typical structure to exhibit agency problems. The 2005 structure reform program stipulates that non-tradable shareholders have to bargain with tradable shareholders in order to gain liquidity. The price that non-tradable shareholders pay to tradable shareholders for gaining liquidity is defined as "compensation." We explore the issue of why corporate governance might play an important role in affecting the level of compensation. Research Findings/Insights: Firms with a weak governance structure or severe agency problems are required to have a higher level of compensation. The level of compensation is positively correlated with the non-tradable shareholding, the pledge ratio, and related-party transactions, and is negatively correlated with foreign shareholdings. The same set of variables dictates the ex-post wealth effect of tradable shareholders, but in the reverse direction. Theoretical/Academic Implications: The share reform provides a natural setting that allows tradable shareholders to reflect their concerns with agency problems. The mechanism could ameliorate the agency problems. Corporate governance, in a broad sense, is related to compensation and the ex-post wealth effect of tradable shares. Practitioner/Policy Implications: A successful mechanism should be designed to have minority shareholders involved in the process and have the final compensation reflect the quality of corporate governance.

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“…First, unlike in the Western world where financial fraud is relatively uncommon, financial fraud is not a rare phenomenon in the Chinese stock market (Zhang, 2004). From 1993, when China's stock market was established, until 2004, financial fraud was detected in over one-sixth of listed firms in China on at least one occasion (Zhang, 2004). 3 Second, although some scholars suggest that the sanctions for financial fraud are not serious in China, crises arising from financial fraud cannot be ignored.…”

Section: Methodology Sample and Datamentioning

confidence: 99%

“…3. Zhang (2004) Maksimovic (1998). Specifically, the externally financed growth rate is a firm's asset growth rate in excess of the maximum growth rate that can be supported by the firm's internally available capital.…”

Section: Notesmentioning

confidence: 99%

Restructuring to Repair Legitimacy – A Contingency Perspective

Wang

2010

Corporate Governance

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Manuscript Type: EmpiricalResearch Question/Issue: This study examines the effectiveness of restructuring in repairing legitimacy after a firm is punished for financial fraud. Research Findings/Insights: We use the antecedents of fraud to distinguish between three types of financial fraud and argue that different types of such fraud affect different dimensions of legitimacy. We also identify four types of restructuring and adopt a contingency perspective to argue that the type of restructuring adopted should match the dimensions of legitimacy affected for a successful legitimacy repair, which is proxied by a positive market response when the restructuring is announced. Using a sample of Chinese listed firms, we find that disassociation from illegitimate business operations and creation of valuable business operations are more effective in repairing legitimacy after fraudulent financial reporting. Disassociation from illegitimate organizational structures and creation of monitors are more effective following embezzlement or stock market manipulation. However, no type of restructuring is effective following improper accounting practice. Market investors value creation of monitors more than they do disassociation from an illegitimate organizational structure, and attach the same value to disassociation from illegitimate business operations and creation of valuable business operations. Theoretical/Academic Implications: This study makes three contributions to the organizational legitimacy and corporate crisis management literature. First, it links corporate crises arising from financial fraud to social legitimacy. Second, it extends the number of restructuring types identified in the legitimacy literature to four, taking content and form as two dimensions. Third, it links corporate crises arising from financial fraud to the effectiveness of responsive restructurings via social legitimacy. Practitioner/Policy Implications: Firms punished for financial fraud should signal restructuring according to the nature of the fraud and address the pertinent dimensions of legitimacy.

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Law, Corporate Governance, and Corporate Scandal in an Emerging Economy: Insights from China

Cited by 14 publications

References 18 publications

Executive Compensation and Corporate Fraud in China

Executive Compensation and Corporate Fraud in China

Non‐Tradable Share Reform and Corporate Governance in the Chinese Stock Market

Restructuring to Repair Legitimacy – A Contingency Perspective

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