Empirical Research On Noneffective Monitoring Mechanism Hypothesis Of Listed Companies' Financial Fraud

At the beginning of the 21st century, so many worldwide financial frauds in prominent companies happened one after another, which makes it a serious challenge: how can we cure listed companies'financial frauds. The main purpose of this paper is to provide theoretic and empirical study on the causes for the non-effectiveness of monitoring mechanism for listed companies'financial frauds in China. Focusing on corporate monitoring mechanism, this paper illustrates that monitoring is one essential function of corporate governance. By comparatively analyzing the effects of corporate governance on deterence of financial frauds with that of internal accounting control system, it is pointed out that the main reason of financial frauds in Chinese listed companies is non-effective monitoring mechanism at the aspect of corporate governance. And then this paper develops research hypotheses and provides empirical evidences about the effects of direct and indirect monitoring mechanisms on financial frauds in public companies. This analysis framework can provide referencable paradigm for future deep research on determinations of financial frauds.The results of empirical tests on the relationship between direct supervisal mechanisms and financial fraud, which can provide reference solutions for China's listed company governance reform, are consistent with the hypothesis that the poor effectiveness of internal governance mechanism is the direct cause of corporate financial frauds. (1)The function of shareholder meeting on preventing frauds is limited and the role of shareholders is dependent on ownership structure. What's more, how ownership concentration works on preventing financial frauds depends on the type of actual controllers, which is an important determination of financial frauds. Therein, ownership concentration turns out not to be effective to prevent financial frauds. (2) The monitoring from independent directors has no effects on frauds, as well as board of directors meeting and auditing committee. The likelihood of financial frauds is higher in the corporate with the chairman of board of directors also is CEO. So it maintains that the chairman of board of directors possesses a leading position and the power of other directors is very limited. (3) The size of supervisory board, the frequency of supervisory board meeting, and the ownership percentage of members in the supervisory board are not related to the likelihood of financial frauds. These results support the fact that the monitoring from the supervisory board is inefficient on deterring corporate fraudulent behavior. (4) The supervision from independent auditors or securities supervision bureaus is negatively related to the probability of financial frauds significantly. Further more, securities supervision bureaus and independent auditing are governance mechanisms which can be substitutes for each other. (5) The direct relationship between board size and financial frauds is negative. What's more, with enlarging board size, its marginal monitoring effects can be enhanced in the beginning and then become smaller; corporate performance is negatively related to frauds, and the indirect links between board size and the likelihood of financial frauds is negative, which means the larger BOD size is, the higher corporate performance is, the lower the likelihood of corporate financial frauds is.Moreover, this paper firstly studies the effects of managerial labour market competition, control rights market, and investor legal protection on the likelihood of financial frauds. The main findings are as follows: (1) Depended on managerial labour market competition, which is an important determination of financial frauds, management compensation and reputation have no significant effects on financial frauds; (2)As for control rights market, it is not other shareholders but only the second largest shareholder can discipline the largest shareholder's behavior efficiently; (3) Managerial labour market competition is a substituted mechanism of management compensation and control rights market, which means, top managers must be paid higher in order to induce managers to behave in ways consistent with shareholders'goals in undeveloped labour market;(4) The relationship between legal protection for investors and financial frauds is negative, and the improvement on investors' legal protection has a negative influence on the likelihood of frauds. The political illustration of these results is that the improvement of legal system is an important institutional arrangement used to strengthen investors'protection and prevent listed companies from financial frauds. The evidences above are helpful to comprehend how the economic and legal institutions bring about financial frauds in China.