Law, Economic, Corporate Governance, and Corporate Scandal in a Transition Economy: Insight from China

摘要

There is much higher ratio of firms with the incidence of scandal in a transition economy such as China than in developed economy. This paper empirically examines whether certain corporate governance mechanism are related to the probability of a firm is associated with corporate scandal. We examine Chinese listed firms that are enforced by Chins Security Regulation Committee (CSRC) or stock exchanges. We find that several key governance characteristics are related to the probability of a firm to commit scandal. These include the types controller of the firm, the ownership level of the largest shareholder, the stock holding of the chairman, and ratio of paid supervisors on the Supervisory Committee. Our findings suggest that the governance mechanism especially ownership does matter in avoiding serious corporate scandal in a transition economy such as China. There is no evidence that several other governance characteristics are related to the probability of a firm commit scandal, including the board size, independent directors, the institution ownership, and the size of Supervisory Committee. We also find that the level of a region’s economy development is negatively related to the probability of a firm in the region to commit scandals. As a region’s GDP per capita increase, a firm in the region will be less likely to commit fraud. In addition we find that in a region where the number of commercial cases investigated by procurator is larger, a firm in the region is more likely to commit scandal. These suggest that the procuratorate system is not effective and when legal system is not effective a firm is more likely to commit scandal if there are more firms or people commit fraud or default in commercial contracts in that “neighborhood”. We find a similar but non-linear relation between the number of commercial suits on the court in a province and the probability of a firm to commit scandal in that region. As the number of commercial suits on the court in a province increases, the probability of a firm to commit scandal rises; when the number of commercial suits on the court reach certain level, the probability of a firm to commit scandal falls. It suggests that when the court system becomes effective and more people and firms go to court to protect themselves, the firms will be constraint in committing fraud. Overall we find that in China corporate governance is essential in avoiding corporate scandal. Moreover, in a transition economy the level of economic development and legal system are also related to firm’s probability to commit fraud.