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CEO Accountability for Corporate Fraud: Evidence from the Split Share Structure Reform in China

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Abstract

We use institutional-related theories and a unique natural experiment that enables an exogenous test of the influence of controlling shareholders on managerial accountability to corporate fraud. In China, prior to the Split Share Structure Reform (SSSR), state shareholders held restricted shares that could not be traded. This restriction mitigated state-owned enterprise controlling shareholders’ incentives to monitor managers. The data examined show the SSSR strengthens incentives of state-owned enterprise controlling shareholders to replace fraudulent management. Our findings support the view that economic incentives are important to promote corporate governance and deter fraud.

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Notes

  1. As a result, alternative perspectives have been put forward in the literature, including the executive power theory (Finkelstein 1992), stakeholder theory (Mitchell et al. 1997), and the stewardship theory (Davis et al. 1997).

  2. Other factors include industry culture (Baucus and Near 1991), industry concentration (McKendall and Wagner 1997), environmental hostility (Baucus and Baucus 1997), environmental dynamism (Baucus and Near 1991; Wang et al. 2010), regulatory pressures (Szwajkowski 1985), board composition (Agrawal and Chadha 2005), and organization culture (McKendall and Wagner 1997).

  3. Kothari et al. (2005) suggest that matching is superior since does not impose a specific functional form on the relationship between the variable of interest and the control variables.

  4. Hou and Moore (2010) suggest that this increase is due to the enactment of a new regulation in 2001 entitled: Solution for Listed Firm Checks. The guidelines gave regulators greater authority and replaces selective checks with regular and special checks, and enhances that endows the regulatory commission.

  5. We follow the approach of Gul et al. (2010).

  6. We also have carried out analyses controlling for CEO-specific variables such as tenure and gender and our main inference remained unchanged. However, due to limitations in data availability of these variables in GTA CSMAR, including these CEO-specific variables results in a substantial reduction of sample size.

  7. In the SOE listed firms subsample used to test hypothesis H3, the median consideration payout ratio is 19.13 % of restricted shares, and the median solicitation period for the reform negotiation process is 10 days.

  8. We thank an anonymous reviewer for the suggestion.

  9. Studies of Western developed economies often associate large shareholders with the incentive alignment effect and better monitoring of executives (Jensen and Meckling 1976; Shleifer and Vishny 1986). For instance, empirical studies reveal that large shareholders are associated with increased managerial turnover (Kaplan and Minton 1994) and tighter control over executive compensation (Bertrand and Mullainathan 2001).

  10. For instance, this policy has been laid out in the Ninth Five-Year Plan for National Economic and Social Development and the Outline for the Long-Range Objective Through the Year 2010.

  11. We list a few recent financial news articles here by translating their Chinese language headlines into English language and provide their web link for reference: “29 firms this year experienced local government stock ownership reduction” http://finance.ifeng.com/stock/zqyw/20110827/4474686.shtml, “Selling shares—July wave of government stock ownership reduction wave” http://stock.hexun.com/2011-07-29/131890710.html, “Local government July stock ownership reduction in 25 listed firms to cash in 3.3 billion RMB” http://www.beelink.com/20110808/2808514.shtml.

  12. We thank an anonymous reviewer for suggesting these interesting ideas.

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Authors and Affiliations

  1. School of Public Finance and Economics, Southwestern University of Finance and Economics, Guanghuacun Street No. 55, Chengdu, 610074, Sichuan Province, People’s Republic of China

    Jiandong Chen

  2. Schulich School of Business, York University, 4700 Keele Street, Toronto, ON, M4P 2A7, Canada

    Douglas Cumming

  3. University of Edinburgh Business School, 29 Buccleuch Place, Edinburgh, EH8 9JS, UK

    Wenxuan Hou

  4. Manchester Business School, University of Manchester Crawford House, Oxford Road, Manchester, M13 9PL, UK

    Edward Lee

Authors
  1. Jiandong Chen
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  2. Douglas Cumming
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  3. Wenxuan Hou
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  4. Edward Lee
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Corresponding author

Correspondence to Wenxuan Hou.

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Chen, J., Cumming, D., Hou, W. et al. CEO Accountability for Corporate Fraud: Evidence from the Split Share Structure Reform in China. J Bus Ethics 138, 787–806 (2016). https://doi.org/10.1007/s10551-014-2467-2

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  • DOI: https://doi.org/10.1007/s10551-014-2467-2

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