This study focuses on a traditional business ethics question and aims to use advanced techniques to improve the performance of corporate fraud prediction. Based on the GONE framework, we adopt the machine learning model to predict the occurrence of corporate fraud in China. We first identify a comprehensive set of fraud-related variables and organize them into each category (i.e., Greed, Opportunity, Need, and Exposure) of the GONE framework. Among the six machine learning models tested, the Random Forest (RF) model outperforms (...) the other five models in corporate fraud prediction. Based on the RF model, we show that Exposure variables play a more important role in predicting corporate fraud than other input variables. These results highlight the importance of Exposure variables in corporate fraud prediction and promote the practical use of the machine learning model in solving business ethics questions. (shrink)

We investigate two under-explored factors in mitigating the risk of corporate fraud and regulatory enforcement against fraud, namely institutional investors and political connections. The role of institutional investors in the effective monitoring of a firm’s management is well established in the literature. We further observe that firms that have a large proportion of their shares held by institutional investors have a lower incidence of enforcement actions against corporate fraud. The importance of political connections for enterprises, whether in a developed market (...) such as the United States or an emerging market such as China, has been established by previous studies. However, we find evidence of another positive effect of political connections: they may reduce the incidence of enforcement action against corporate fraud. We also find that political connections play a more significant role in reducing regulatory enforcement incidents against non-state-owned enterprises and firms in weaker legal environments, whereas institutional ownership plays a more important role in reducing regulatory enforcement incidents against state-owned enterprises. (shrink)

This paper examines the effectiveness of public enforcement by studying the effects of regulatory intervention to curb tunneling through intercorporate loans in China. Specifically, we explore whether public enforcement efforts in 2006 resulted in less tunneling, and ultimately in increased performance for tunneling firms. We show that tunneling is among the dominant factors increasing the likelihood of becoming blacklisted. We also find that firms’ tunneling mechanisms decreased significantly after the regulatory shock, and that their performance increased significantly compared to non-tunneling (...) firms after the regulatory shock. Finally, we find a positive market reaction to the public announcement of tunneling both for firms that have been blacklisted and other tunneling firms that are not blacklisted. Collectively, these results suggest that public enforcement in the presence of a credible threat succeeds in deterring the effect on tunneling behavior in China. (shrink)

This paper explores how managers’ and supervisors’ equity incentives impact the likelihood of committing corporate fraud in Chinese-listed firms. Previous research has shown that corporate fraud in China is a widespread phenomenon and has severe consequences for affected firms and executives. However, our understanding of the reasons that fraud is committed in a Chinese setting has been very limited thus far. This is an increasingly important topic, because corporate governance is rapidly changing in China, and it is unclear whether adopting (...) the executive compensation practices of the West is appropriate for Chinese firms. We show that managers’ equity incentives increase their propensity to commit corporate fraud. We also find that this effect is more pronounced for state-owned firms. However, we find a negative but not significant relationship between the equity incentives of the supervisory board and the incidence of fraud. (shrink)

This paper examines the relationship between performance persistence and corporate governance. We document systematic differences in performance persistence across listed companies in China during 2001–2011, and empirically demonstrate that firms with better corporate governance show higher performance persistence. The results are robust over both the short and long terms. We also find that performance persistence is an important factor in refinancing, and it can lower companies’ costs of borrowing. Overall, our findings offer important implications for business ethics, as we demonstrate (...) how corporate governance can lower companies’ costs of debt. (shrink)

We investigate the regulatory sanctions imposed on independent directors for their firms’ financial frauds in China. These regulatory sanctions are prima-facie evidence of significant lapses in business ethics. During the period 2003–2010, 302-person-time independent directors were penalized by the regulator, and the two stock exchanges. We find that the independent directors with accounting experiences are more likely to be penalized by the CSRC, though they do not suffer more severe penalties than do the other sanctioned independent directors. We also find (...) that independent directors suffer less severe penalties than do the insider directors. These results are consistent with the hypothesis that the sanctions on independent directors are tied to their assumed ethical and legal responsibilities. Following a regulatory sanction, penalized independent directors experience a significant decline in the number of other board seats held. However, they can gain board seats in better quality firms. We find that interlocked firms that share penalized independent directors with the fraud firm do not suffer from a valuation decline. Overall, our results suggest that regulatory sanctions have not triggered further sanctions on the penalized directors in the labor market but they have, instead, created a disincentive for these directors to serve on the company boards of high-risk firms. (shrink)

We examine the dynamics between enforcement actions and the responses from both the board of directors and supervisory boards amid China's governance reform. Rather than examining determinants of fraudulent activities, we investigate, after enforcement actions are imposed, whether the board of directors and supervisory boards react differently, and whether their different reactions play a role in preventing future occurrences of frauds. We find that both boards react to enforcement actions, but only the responses from the board of directors help us (...) curb future enforcements under certain circumstances. The supervisory board fails to play any role in preventing future enforcements, even though it is one of the two monitoring mechanisms in the listed companies. Policy implications are discussed. (shrink)

This paper investigates the emerging effect of mutual fund involvement on the agency problem between majority and minority shareholders during the pre-IFRS period in China indicated by earnings informativeness from an ethical perspective. We find that the presence of mutual fund hampers earnings informativeness implying that mutual funds in general, at their early stage in China, are not yet capable of serving as an effective monitor. This finding is in sharp contrast to the role of institutional investors in mature markets (...) as documented in the literature. However, mutual funds affiliated with banks have been found to be effective to improve earnings informativeness of Chinese listed companies, and the impact is more pronounced among those affiliated with joint-equity banks compared to their counterparts affiliated with state-owned banks. (shrink)

Following the financial crisis and recent recession, the center of gravity of global economic growth and competitiveness is shifting toward emerging economies. As a leading and increasingly influential emerging economy, China is currently attracting the attention of academics, practitioners, and policy makers. There has been an increase in research interest in and publications on issues relating to China within high-quality international academic journals. We therefore organized a special issue conference in conjunction with the Journal of Business Ethics in Lhasa, Tibet, (...) on May 19–20, 2014, on Business Ethics in Greater China: Past, Present and Future. The papers for the special issue focused on the intersection of ethics and finance, and fit within one of the three themes: environment and sustainability, corporate social responsibility, and fraud. Within these themes, issues of intellectual capital protection, gender equality, political connections, regional development, investor protection, corporate stewardship, trust and corruption, and corporate transparency each play a significant role. In this paper, we survey these studies and the related literature to provide a comprehensive coverage of business ethics and finance issues that affect China. (shrink)

This study investigates the relation between CEO compensation and corporate fraud in China. We document a significantly negative correlation between CEO compensation and corporate fraud using data on publicly traded firms between 2005 and 2010. Our findings are consistent with the hypothesis that firms penalize CEOs for fraud by lowering their pay. We also find that CEO compensation is lower in firms that commit more severe frauds. Panel data fixed effects and propensity score methods are used to demonstrate these effects. (...) Our results also indicate that corporate governance mechanisms influence the magnitude of punishment. We find that CEOs of privately controlled firms, firms that split the posts of CEO and chairman, and CEOs of firms located in developed regions suffer larger compensation penalties for committing financial fraud. Finally, we show that CEOs at firms that commit fraud are more likely to be replaced compared to those at non-fraud firms. (shrink)

This study investigates the antecedents of human rights infringements by emerging market firms. We used fuzzy set qualitative comparative analysis to examine HRIs in 245 firms based in eight emerging markets, between 2003 and 2012. Our findings disclose three equifinal configurations of high levels of HRIs, all involving EFs that have expanded to a high number of foreign markets: large, old, low performing state-owned enterprises operating in high quality institutions’ home and host markets, small, young, over-performing EFs operating in low (...) quality institutions’ home and host markets, and finally large, old, high performing SOEs, operating in low quality institutions’ home and host markets. We contribute to the literature by examining a novel dataset on HRIs by EFs, and by building a configurational explanation of HRIs that bridges the arguments of the institutional theory and strain theory literatures on corporate wrongdoing. (shrink)

We use institutional-related theories and a unique natural experiment that enables an exogenous test of the influence of controlling shareholders on managerial accountability to corporate fraud. In China, prior to the Split Share Structure Reform, state shareholders held restricted shares that could not be traded. This restriction mitigated state-owned enterprise controlling shareholders’ incentives to monitor managers. The data examined show the SSSR strengthens incentives of state-owned enterprise controlling shareholders to replace fraudulent management. Our findings support the view that economic incentives (...) are important to promote corporate governance and deter fraud. (shrink)