Party direct control and corporate fraud: Evidence from China

Abstract

This study examines the impact of the involvement of Party committees of the Communist Party of China in the decision-making process of state-owned enterprises (SOEs) in China on fraudulent activities. Based on a sample of 1180 listed SOEs covering the period 2004–2019, we present empirical evidence of a negative relationship between Party direct control and the likelihood of corporate fraud, mainly driven by the effect of Party participation in the board of directors. Additional evidence suggests that Party direct control raises the anticipated costs associated with fraud by facilitating the exposure of fraudulent activities and enhancing the likelihood of CEO dismissal upon the detection of wrongdoing. Furthermore, we observe that the negative association between party direct control and corporate fraud is weakened in firms with robust external monitoring mechanisms and significant levels of state ownership. Additionally, our findings reveal that the deterrent effect of Party direct control on corporate fraud is enhanced following the implementation of the 2015 “Discussion Precedence” reform, which bestowed Party committee members with increased decision-making authority in SOEs.