Does Network Embeddedness Deter Corporate Fraud? Evidence from China

Abstract

ABSTRACT This study examines the impact of social networks on corporate fraud. We contend that firms’ network embeddedness increases the expected cost of fraud, which in turn reduces the likelihood of committing fraud. Using data on the network of Chinese listed firms between 2007 and 2019, we find evidence that firms with a higher degree of network embeddedness are less likely to engage in fraudulent activities, suggesting the governance role of social networks. Further analyses reveal that this negative relationship is stronger when the firm faces more intense market competition, has more interactions with partners, or receives more media coverage. Our findings are robust to instrument variable regression, controlling for firm-fixed effects, alternative measures of network embeddedness, and addressing the partial observation problem. This study provides novel insights into the determinants of corporate fraud from a network perspective.