Multiple large shareholders and corporate fraud: evidence from China

Zhengguang Li,Xibo Zhao,Dan Yang,Lynda Song

doi:10.1186/s11782-021-00106-9

Abstract

This study tests the effect of multiple large shareholders on the level of corporate fraud using the data of Chinese listed companies from 2010 to 2018. We find lower probabilities and lower corporate fraud frequencies when there are multiple large shareholders in Chinese listed companies, indicating that their presence plays a supervisory role in internal governance. These results persist after we control for endogeneity. Moreover, the effect of multiple large shareholders on corporate fraud is strengthened with the separation of control right and cash flow right. Further analyses reveal that companies with multiple large shareholders experience considerably reduced information disclosure fraud but no reduction in operating or leader frauds. Additionally, information asymmetry and the capital occupation of controlling shareholders both play a mediating role in the relationship between multiple large shareholders and the level of corporate fraud. This study enriches the literature on the determinants of corporate fraud and the effects of multiple large shareholders. Our findings also provide implications for companies and regulators regarding ways to reduce fraud.

Highlights

Corporate fraud causes a series of destructive economic consequences for companies, including damage to their reputation, decreased investor confidence, increased financing costs, and company value reductions (Yu and Yu 2011)
Changes in the number of shares held by multiple large shareholders could convey information to other investors, reducing the degree of information asymmetry. Consistent with this reasoning, we find that information asymmetry and capital occupation both mediate the relationship between multiple large shareholders and the level of corporate fraud
After controlling for occupation in models (1-a) and (1-b), we find that multiple large shareholders (Multi) is still significantly negative and Occ is positive as shown in columns (5) and (6) of Table 7, consistent with the assumption that the capital occupation of controlling shareholders may be positively related to the level of corporate fraud

Summary

Introduction

Corporate fraud causes a series of destructive economic consequences for companies, including damage to their reputation, decreased investor confidence, increased financing costs, and company value reductions (Yu and Yu 2011). Multiple large shareholders may tunnel a company, reducing the effectiveness of corporate governance and leading to an increase in corporate fraud This issue represents an empirical question to be tested. Changes in the number of shares held by multiple large shareholders could convey information to other investors, reducing the degree of information asymmetry Consistent with this reasoning, we find that information asymmetry and capital occupation both mediate the relationship between multiple large shareholders and the level of corporate fraud. This study shows that an ownership arrangement that includes multiple large shareholders can improve the governance of listed companies in China and reduce the probability and frequency of corporate fraud.

Literature review and hypothesis development

Findings

Conclusion