| China's capital market has developed rapidly over the past 20 years.The number of listed companies continues to increase,and a multilevel capital market has been established.The frequent institutional transitions and incomplete supervision rules leave a number of loopholes for lawless firms.Although a series of laws,such as the Security Law,Stock Issuing and Trading Act,and Accounting Law,have been enacted or revised to cope with this,the frequency and severity of corporate fraud continue to increase.This has severely disrupted the market order and harmed the interests of investors.Therefore,how to restrain the fraudulent behavior of listed companies and protect the legitimate rights and interests of all participants in the market has become a focus topic of theory and practice.According to the fraud triangle theory,the occurrence of corporate fraud is the result of the three major factors of motivation,opportunity and self-rationalization,and the three are indispensable.Obviously,it is difficult for companies and regulators to eliminate incentives for corporate fraud,but opportunities for corporate fraud can be reduced through the design of the system.Therefore,the existing literature mainly discusses the influencing factors of corporate fraud from perspectives of internal and external corporate governance.However,starting from the general theories of corporate finance and relevant empirical studies,it is not difficult to find that the differences of corporate fraud in the capital market are obviously firstly related to the ownership structure of the company dominated by controlling shareholders,and at the same time influenced by the corporate governance environment.Different from the highly dispersed ownership in the West,the ownership of listed companies in China is relatively concentrated.Some scholars have noticed the influence of this special ownership structure on corporate fraud in China(Chen et al.,2006;Chen,Lin,and Wang,2005;Tang,2007;Wang and He,2020).However,these studies focus on the effect of the largest shareholder's control rights on corporate fraud.In fact,the behavior of the largest shareholder is controlled by the ultimate controller.Therefore,from the perspective of ultimate control rights,we can more accurately and completely analyze the effect of ownership structure on corporate fraud.Moreover,for the measurement of ultimate control rights,the existing studies focus on a single control-rights measure,and believe that the control rights of the ultimate owner should be calculated according to the Weakest-Link Principle(La Porta et al.,1999).But this way of measuring ultimate control rights is questionable,it has no theoretical basis,so there are some potentially serious problems.Furthermore,existing studies ignore the influence of corporate governance environment on the relationship between ultimate control rights and corporate fraud,but the influence of ultimate control rights on corporate fraud must be carried out under a specific governance environment.Therefore,it is necessary to consider the moderating effect of corporate governance environment when analyzing the influence of ultimate control rights on corporate fraud.In addition,the existing research on corporate governance environment usually only focuses on the internal corporate governance mechanism,but ignores the external corporate governance mechanism.In order to solve the principal-agent problem caused by information asymmetry,we need not only scientific and effective internal governance mechanism,but also external governance mechanism.Therefore,when we discuss the influence of corporate governance environment on the relationship between ultimate control rights and corporate fraud,we will comprehensively consider the moderating effect of these two mechanisms.Voting power indices provide measures of the ability of a voter holding a specified proportion of voting rights to determine the outcome of a vote,given the overall proportion required to win and the distribution of other voters' rights(Felsenthal and Machover,1998).They thus provide natural measures of control rights(Leech,1988,2002;Edwards and Weichenrieder,2009).Hence,in this article,we use the Shapley-Shubik Power Index(Shapley and Shubik,1954)to measure the ultimate control rights,and then investigate the relationship between ultimate control rights and corporate fraud,and the moderating effect of internal and external corporate governance mechanisms on this relationship.Using the data of listed companies in China's main board market from 2013 to 2018,we find that ultimate control rights have a significant “restraining effect” on corporate fraud.Specifically,the greater the ultimate control rights,the lower the probability of fraud.Furthermore,we consider the effect of ultimate control rights on more specific characteristics of corporate fraud(including fraud subjects,types and severity)and find this restraining effect still exists.In addition,this paper examines the influence of internal and external corporate governance mechanisms on the relationship between the ultimate control rights and corporate fraud,and finds that the internal and external corporate governance mechanisms have a certain moderating effect on the restraining effect of the ultimate control rights.Specifically,with the improvement of internal corporate governance mechanism(size of the board,proportion of independent directors,size of the board of supervisors,shareholding ratio of management)and external corporate governance mechanism(attention of analysts,whether to hire high-quality auditors,degree of competition in the product market),the restraining effect of ultimate control rights on corporate fraud is weakened.Finally,we conduct a series of robustness tests that further confirm the validity of our findings:(1)Regarding the endogeneity issue,we adopt the propensity score matching(PSM)method and rerun the main regressions based on selective subsamples.The results are consistent with previous findings.(2)To address the partial observability issue of corporate fraud,we employ a bivariate probit model and rerun the main regressions,and find the ultimate control rights are negatively associated with fraud propensity,and are positively associated with fraud detection.This further confirms the conclusion of this article.(3)Although the regression model in this paper controls many influencing factors,there may still be the problem of missing variables.Therefore,we use the fixed effects model to re-examine the effect of ultimate control rights on corporate fraud.The results are consistent with previous findings.(4)Change the measurement method of variables.First,taking the number of corporate frauds as the dependent variable,it is found that the ultimate control rights is significantly negatively correlated with the number of corporate frauds,which further confirms the conclusion of this article.Second,take the control rights of the largest shareholder as an independent variable,examine its relationship with corporate fraud,and find that the control rights of the largest shareholder is significantly negatively correlated with corporate fraud.This shows that both the control rights of the largest shareholder and the ultimate control rights can restrain the company's fraudulent behavior,which further supports our conclusion.This study contributes to the literature in several ways:First,from the perspective of the ultimate controller,this paper analyzes the influence of ultimate control rights on corporate fraud,which complements prior research on the effect of ownership structure on corporate fraud.Second,this study enriches control rights literature.Based on corporate finance theory and related research,it is not difficult to find that ultimate control rights is the key to understanding the differences and changes in corporate behavior in the capital market.In this paper,we use Shapley-Shubik Power Index to calculate ultimate control rights,which provides alternative measure of control rights.So that we don't have to rely on WLP measurement completely,and help us evaluate the robustness of conclusions based on WLP.Third,under the analytical framework of the principal-agent theory,this paper incorporates the internal and external corporate governance mechanisms into the study of the relationship between ultimate control rights and corporate fraud,which will help expand the existing literature on how corporate governance mechanisms affect ultimate control rights or corporate fraud,thereby revealing the mechanism by which the ultimate control rights affects corporate fraud. |
PDF Full Text Request