Under The Control Of The Largest Shareholder Of Listed Companies' Financial Fraud

Financial fraud came into existence at the beginning that the joint-stock company appeared. As the development of securities market, financial fraud has been more common. From the point of view of international background, financial fraud occurred in almost every country in the world and became a world problem. In China, financial fraud took place in listed company instantly at the start of foundation of Chinese security market. So, financial fraud is a widespread, a long-standing and a difficult problem in corporate governance.Faced with corporate financial fraud and its serious economic consequences, every country takes positive measures, such as theoretical and practical research which is helpful to the control of financial fraud of listed company in every country to some extend. But the financial fraud arose from various area such as economic factors, law institution and managerial problems, so the resolution of financial fraud can not only depend on accounting and audit, but depend on corporate governance ultimately.According to the analytic logic of institutional economics, institution guides and constraints somebody's behavior by affecting his interest . Somebody's behavior is always the result of institutional arrangement which has some inevitability. Corporate governance, as a kind of institutional arrangement, guides and constraints listed company's behavior of providing its financial statements. The widespread of financial fraud is the result of institutional defect. This paper tries to analyze and resolve the problem of listed company's financial fraud in China from the point of institutional background—corporate governance according to the analytic logic mentioned above.Through the retrospect of traditional theory of corporate governance we can see that despite the noticeable achievement of traditional theory of corporate governance , it is mainly done by the west scholars, which is based on the interest conflicts between shareholders and managers in the circumstance of highly decentralization of stock structure, negligence of shareholder's heterogeneity. At the same time, stock structure of most listed company in China is centralized under the control of large shareholders, and other stock structure is dispersed to numerous small shareholders. In this circumstance, traditional theory of corporate governance can't analyze and resolve the problem of listed company's financial fraud in China because of it's defect on explaining China's economic reality effectively. This paper tries to use the theory of large shareholder and corporate governance to analyze the behavior of listed company's financial fraud in China controlled by large shareholder. There is serious interest conflict between large shareholder and small shareholder when listed company is controlled by large shareholder. Large shareholder has strong motivation to carry out financial fraud such as profit manipulation and unequal related transactions in order to reap the private benefit of control.Share-trading Reform could resolve the problem mentioned above to some extend, however, the centralization of share structure by large shareholders could not be overturned, which is still the important characteristic of listed company of China .This paper, based on the theory with respect of the governance of corporation and large shareholders, discusses the reason, the pattern and the regulation of financial fraud of listed company of China through the logic of institutional economics. This paper includes 6 parts as follows:Chapter 1, Introduction. The background at home and aboard, the theoretical and practical value, the theme, the method, the frame and the key concepts is illustrated. Chapter 2, recitations and reviews of the relevant works. The Works relevant to financial fraud and traditional theories of corporate governance is recited and reviewed, of which defaults are pointed out. Accordingly, the value of this paper is revealed.Chapter 3, the institutional analysis of listed company's governance in China. The institutional background is been illustrated for disclosure of key problem of listed company's governance and trait of financial fraud, including the process of state-owned corporation reform, special institution of stock market, preference of listed company to equity financing. The stock structure of most listed company in China is centralized under the control of large shareholders, and other stock structure is dispersed to numerous small shareholders. As a result, large shareholders absolutely control the boards of directors and supervisors, so, supervisors on behalf of large shareholders can not supervise the directors and corporate governance has no effect.Chapter 4, the analysis of financial fraud of listed company. The pattern of financial fraud of listed company, such as the fraud of profit manipulation and interest transfer by illegal related transactions, is analyzed through classical case. At the end of this Chapter, the new trend of financial fraud controlled by large shareholder on the ground of full circulation is analyzed.Chapter 5, the theory about relationship between large shareholder and corporate governance. In this chapter theory of large shareholder and corporate governance is explained and the mechanism of financial fraud of listed company in China is illustrated .First, the widespread existence of large shareholder and the theoretical basis of supervision to large shareholder is illustrated. Large shareholder has motivation and capability to supervise and control managers while other small shareholders are willing to be free-riders and give up the supervision to managers. Second, the motion and the way of large shareholder to reap the private benefit of control is illustrated. At last, the control of large shareholder and financial fraud is combined and analyzed, and the financial fraud arose from the control of large shareholder is summarized. There is serious interest conflict between large shareholder and small shareholder when listed company is controlled by large shareholder. Large shareholder has strong motivation to carry out financial fraud such as profit manipulation and unequal related transactions in order to reap the private benefit of control.Chapter 6, measures of constraint of Large Shareholder and prevention from financial fraud. Basically, the financial fraud of listed company arose from the imperfect corporate governance. Large shareholders absolutely control the boards of directors and supervisors, Supervisors on behalf of large shareholders can not supervise the directors and corporate governance has no effect. As a result, the key measures of discovery and rectification are enhance the inner and outer corporate governance, such as two aspects: improve the inner governance and control of listed company, and enhance the outer supervision and control. Specifically, there are three measures on inner governance: first, found the perfect institution of balance of shareholder's structure; second, improve the inner balance of corporation; third, enhance inner control, and there are three measures on outer governance: establish accounting rules with high quality; perfect the protection of investors; enhance the regulation of information disclosures.