Ownership structure, corporate governance, and fraud:Evidence from China
Gongmeng Chen a, Michael Firth b,*, Daniel N. Gao a,c, Oliver M. Rui d
a Antai School of Management, Shanghai Jiaotong University, China
b School of
Accounting and
Finance, The Hong Kong Polytechnic University, Kowloon, Hong Kong, China
c Jinhe Centre for Economic Research, Xi’an Jiaotong University, China
d Chinese University of Hong Kong, Hong Kong, China
代写英文论文Received 26 February 2005; received in revised form 7 September 2005; accepted 8 September 2005
Available online 2 November 2005
AbstractOur study examines whether ownership structure and boardroom characteristics have an effect on
corporate financial fraud in China. The data come from the enforcement actions of the Chinese Securities
Regulatory Commission (CSRC). The results from univariate analyses, where we compare fraud and nofraud
firms, show that ownership and board characteristics are important in explaining fraud. However,using a bivariate probit model with partial observability we demonstrate that boardroom characteristics areimportant, while the type of owner is less relevant. In particular, the proportion of outside directors, thenumber of board meetings, and the tenure of the chairman are associatedwith the incidence of fraud. Ourfindings have implications for the design of appropriate corporate governance systems for listed firms.Moreover, our results provide information that can inform policy debates within the CSRC.
D 2005 Elsevier B.V. All rights reserved.
JEL classification: G34
Keywords: Ownership; Corporate governance; Fraud; China’s enforcement actions
1. Introduction
China began a process of economic restructuring in the late 1970s and these reforms continue
to this day. Principal aims of the reforms include the modernization of industry, stimulation of
0929-1199/$ - see front matter D 2005 Elsevier B.V. All rights reserved.
doi:10.1016/j.jcorpfin.2005.09.002
* Corresponding author. Tel.: +852 2766 7062; fax: +852 2330 9845.
E-mail address: afmaf@inet.polyu.edu.hk (M. Firth).
Journal of
Corporate Finance 12 (2006) 424– 448
www.elsevier.com/locate/jcorpfin2. China’s economic restructuring, regulatory reforms, and prior research
2.1. Economic reforms
China’s enterprise reforms have been far-reaching. From a centrally planned economy where
managers of SOEs followed orders from government ministries, the reforms have devolved
powers to the restructured enterprises and given managers a lot of discretion over funding,
products, pricing, and labor practices. Managers are increasingly being appointed on merit rather
than political patronage and personal connections.
The enterprise reforms involve carving out the operational units of the SOEs4 and
reorganizing them as limited liability companies with share capital and with profit making
objectives. Many of these companies have subsequently listed on the stock market and raised
capital by IPOs. A major characteristic of China’s enterprise reforms is the state’s retention of a
controlling stake in listed firms.5 This stake is held directly by central government and its
associated ministries (including state asset management bureaus), and by city, regional, and local
government. On average, about 30% of the shares are owned by the state (central government),
its ministries, and local and regional government. Another 30% of the shares are owned by legal
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