Does the External Monitoring Effect of Financial Analysts Deter Corporate Fraud in China?

We examine whether analyst coverage influences corporate fraud in China. The fraud triangle specifies three main factors, i.e. opportunity, incentive, and rationalization. On the one hand, analysts may reduce the fraud opportunity factor through external monitoring aimed at discouraging managerial misconduct, which can moderate agency problems. On the other hand, analysts may increase the fraud incentive factor by pressurizing managers to achieve short-term performance targets, which can exacerbate agency problem. In either case, the potential influence of analysts on the fraud rationalization factor may be more pronounced among firms that are more dependent on the capital market for corporate finance. Using a sample of Chinese listed firms, we show a negative association between corporate fraud propensity and analyst coverage, and that this effect is more pronounced among non-state-owned enterprises, which are more reliant on the stock market for external funding. These findings suggest that analyst coverage contributes to corporate fraud deterrence in emerging economies characterized by weak investor protection. The main policy implication is that further development of the analyst profession in emerging economies may benefit investors and strengthen business ethics.     

The Challenges of Detection and Enforcement of Insider Trading

Taking advantage of the China’s recent anti-corruption campaign, we attempt to examine the effect of public governance on a firm’s incentive to commit fraud. Using enforcement actions data from the Chinese Securities Regulatory Commission (CSRC) from 2004 to 2014, we find that, due to enhanced public governance, firms are less likely to commit fraud in the post-campaign period than in the pre-campaign period. We further show that the effect of public governance is more evident in privately held listed firms, in firms with weak legal environment, and in firms in areas with poor local economies. In addition, we find that older CEOs respond less actively to the public governance caused by anti-corruption regulations. This paper offers clear policy implications for business ethics by indicating that public governance provides external monitoring of corporate decisions.     

Good Apples,Bad Apples: Sorting Among Chinese Companies Traded in the U.S.

Committing financial fraud is a serious breach of business ethics. However, there are few large scale studies of financial fraud, which involve ethical considerations. In this study, we investigate the pervasive financial scandals, which by the end of 2012 involved more than a third of the US-listed Chinese companies. Based on a sample of 262 US-listed Chinese companies, we analyze factors that differentiate between firms that commit financial fraud and those that do not. We find that firms more predisposed to unethical behavior, due to their low regional social trust in the home country and low respect for regulations and laws as proxied by political connections, are more likely to commit accounting and financial fraud. They take advantage of low hurdles for listing via reverse mergers and avoid third-party monitoring through poor governance and auditors. Finally, we find evidence, after these scandals, of non-fraudulent firms differentiating themselves from the fraudulent firms by sending costly signals such as insiders purchasing shares, increasing dividends, and going private.     

Corporate governance in publicly traded small firms: A study of Canadian venture exchange companies

Most evidence regarding the determinants and effects of corporate governance practices is based on large firms. Herein, we explore these issues in the context of small publicly traded Canadian companies. We exploit the fact that such firms were not subject to corporate governance guidelines prior to 2005 and thus analyze the determinants of voluntary governance practice choices, as well as the effects of those practices on firm performance. Using a unique data set, we construct a corporate governance index for each firm. We measure performance by two variables: quality of accounting earnings and financial performance. The results indicate that corporate governance does matter for smaller traded Canadian firms. We find that both accounting and financial performance are positively related to corporate governance; however, their underlying mechanisms may differ somewhat. Given this result, it would be natural to expect all firms to choose higher levels of governance. However, our results also suggest small firms face resource constraints that limit their choices. We conclude that good governance is an important driver of small firm performance that cannot be neglected by the owners and managers of these firms.     

Are Stock Options Grants to CEOs of Stagnant Firms Fair and Justified?

Prior research has examined several ethical questions related to executive compensation. The issues that have received most attention are whether executives’ pay is fair and justified by performance. Since more recent studies show that stock options grants constitute the single largest component in executive compensation, we examine the relations of these grants to economic determinants and corporate governance for firms in the stagnant stage of their lifecycle. We find that, on average, stock options grants comprise a significant portion of annual CEO compensation (26.4%) for stagnant firms. We also find that economic (corporate governance) factors explain less (or more) of the cross-sectional variation in stock options grants for stagnant firms than for growth firms. Furthermore, we document lower pay-performance sensitivity (i.e., weaker incentive alignment) and no improvement in future firm performance from past stock options grants to CEOs of stagnant firms. In particular, our study provides empirical evidence on some inefficiencies associated with stock options grants to CEOs of low potential (stagnant) firms, a long-standing concern of business ethics researchers (Moriarty, 2005; Nichols and Subramaniam, 2001; Perel, 2003). Our results also provide support for the corporate governance reforms discussed in Matsumura and Shin (2005), especially those proposed provisions that curtail the power of CEOs in the governance of firms.     

The Anatomy of Corporate Fraud: A Comparative Analysis of High Profile American and European Corporate Scandals

This paper presents a comparative analysis of three American (Enron, WorldCom and HealthSouth) and three European (Parmalat, Royal Ahold and Vivendi Universal) corporate failures. The first part of the analysis is based on a theoretical framework including six areas of ethical climate; tone at the top; bubble economy and market pressure; fraudulent financial reporting; accountability, control, auditing, and governance; and management compensation. The second and third parts consider the analysis of these cases from fraud perspective and in terms of firm-specific characteristics (ownership structure) and environmental context (coverage in media and academic literature, regulatory and corporate governance frameworks). The research analyses shed light on the fact that, despite major differences between Europe and U.S. in terms of political institutions, laws and regulations as well as managerial practices, there are significant similarities between six groups. The analysis also demonstrates that, the ethical dilemma has been coupled with ineffective boards, inefficient corporate governance and control mechanisms, distorted incentive schemes, accounting irregularities, failure of auditors, dominant CEOs, dysfunctional management behavior and the lack of a sound ethical tone at the top. Significant similarities were also observed in the analysis from the fraud triangle perspective. However, there are several major differences between the six corporate failure cases particularly with regard to ownership structure, coverage in media, and legal, regulatory and governance frameworks. This research study may have several academic and practical contributions, particularly because of multidisciplinary, international features, and comparative analyses used in the paper.     

Executive Compensation and Corporate Fraud in China

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.     

Is Corporate Governance in China Related to Performance Persistence?

This paper examines the relationship between performance persistence and corporate governance (as proxied for by board characteristics and shareholder structure). 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.     

资产质量与公司违规行为

文章以2003—2015年我国A股上市公司为研究样本,探讨了公司的资产质量对公司违规行为的影响。研究表明,良好的资产质量能够减少公司的违规行为,这种影响在控制了可能的内生性问题后依然显著。此外,文章还发现,资产质量对信息披露违规的影响较大,而在非信息披露违规中不显著;公司所处的内外部环境显著影响资产质量的治理效果。文章的研究结论丰富了公司违规行为影响因素方面的文献,为我国会计准则改革的必要性提供了证据支持。     

Corporate Governance and Institutional Transparency in Emerging Markets

This paper posits that differences in corporate governance structure partly result from differences in institutional arrangements linked to business systems. We developed a new international triad of business systems: the Anglo-American, the Communitarian and the Emerging system, building on the frameworks of Choi et al. (British Academy of Management (Kynoch Birmingham) 1996, Management International Review 39, 257–279, 1999). A common factor determining the success of a corporate governance structure is the extent to which it is transparent to market forces. Such transparency is more than pure financial transparency; as it can also be based on factors such as governmental, banking and other types of institutional transparency mechanism. There may also be a choice for firms to adopt voluntary corporate disclosure in situations where mandatory disclosure is not established. The Asian financial crisis of 1997–1999 and the more recent corporate governance scandals such as Enron, Andersen and Worldcom in the United States and Ahold and Parmalat in Europe show that corporate governance and business ethics issues exist throughout the world. As an illustration we focus on Asia’s emerging¹ markets, as, both in view of the pressure of globalization and taking into account the institutional arrangements peculiar to the emerging business system, these issues are important there. Particularly for those who have to find an accommodation between the corporate governance structures and disclosure standards of the Emerging system and those of the Anglo-American and Communitarian systems.     

What Corporate Governance Can Learn from Catholic Social Teaching

This reflection focuses on what insights Catholic Social Teaching (CST) can provide for corporate governance. I argue that the ‘standard’ agency theory is overly reductionist and insufficiently incorporates important economic limitations (such as asymmetric information, incomplete contracts, and the need for coordination) as well as human frailty. As a result, such agency theory insufficiently distinguishes firms from markets, which can easily relativize how we treat others and facilitate rationalization of unethical behavior. I then explore how three pillars of CST—human dignity, solidarity, and subsidiarity—can help overcome these limitations. CST proposes a vision of the business corporation as a community of persons, working together in cooperative business relationships toward the shared purpose of contributing to human flourishing.     

Leadership and Business Ethics: Does It Matter? Implications for Management

This paper reviews the relationship between organisational leadership, corporate governance and business ethics, and considers the implications for management. Business ethics is defined, and the causes and consequences of unethical behavior are discussed. Issues pertaining to leadership, subordinate and organisation responsibility for business ethics are considered. The changing role of business leaders and the new concept of 'corporate governance' are examined, with an increasing importance being placed on ethical and socially responsible attitudes towards business. Organisational effectiveness and organisational efficiency, formerly central issues for practising managers, with directors thinking in terms of goal achievement for their respective organisations, have now been augmented by an awareness of issues in business ethics, and a requirement for members of the corporate governance to behave in more socially responsible ways. A secondary aim of the paper is to introduce an approach which illustrates how corporate governance and management could deal with some of the moral dilemmas that they may have to face.     

Monitoring Costs,Managerial Ethics and Corporate Governance: A Modeling Approach

This article evaluates effectiveness and costs of external regulation, in particular the Sarbanes–Oxley Act of 2002 (SOX) in restricting managerial malfeasance and safeguarding shareholder interests. It discusses the role of managerial ethics as an alternative corporate governance mechanism to protect shareholder value. This article builds a mathematical model to illustrate shareholders’ choices of best corporate governance mechanisms, taking into account the influence of managerial ethics, effectiveness and costs of monitoring. We suggest that the best corporate governance design and the optimal monitoring expenses are influenced by managerial types, monitoring efficiency, and effectiveness of ethics education. We conclude that stringent regulation and monitoring may not always enhance shareholder value. When managerial ethics could be improved by ethics education or social norms, ethics education may be a better alternative than stringent regulation.     

Dividends Behavior in State- Versus Family-Controlled Firms: Evidence from Hong Kong

This study comparatively examines the dividends behavior in state-controlled firms versus family-controlled firms. With the sample of large industrial firms listed on the Main Board of Hong Kong Stock Exchange, we investigate the dividends payment rates, stability of dividends payment, the effects of firm size, profitability and growth opportunity on likelihood to pay dividends, as well as the concentration of dividend in state-controlled versus family-controlled firms. Based on the findings, we derive some ethical implications of dividends policy regarding the differences in business ethical behavior, corporate social responsibility, corporate governance, business sustainability, and shareholder activism in state-controlled versus family-controlled firms, as well as the improvement in these respects through cross-listing in Hong Kong.     

Modern Russian corporate governance: convergent forces or product of Russia’s history?

Does Russian corporate governance in the new millennium amount to a gradual evolution towards US-style corporate governance, or can it be expected to continue to reflect historical institutions and national culture? When multinationals complain about State interference in firms’ strategies and operations, can this be a permanent state of affairs, or is the situation likely to change?After 1991, Russia, in the middle of a huge crisis, embarked on a program of mass privatization, ostensibly with a view to creating full, market-based corporate governance, with open information disclosure, and enterprise ownership by outside investors having no relationship with the firm other then through their shares. In practice, however, it has become clear that a very different pattern has emerged, especially in manufacturing industries with relational investors, including managers and employees, as well as banks and other firms linked horizontally or vertically, little share liquidity. There is continued hostility towards active western and other genuinely ‘outside’ investors, and persistently strong State influence. This paper argues that this outcome can only be understood in the context of business history.     

Psychological Pathways to Fraud: Understanding and Preventing Fraud in Organizations

In response to calls for more research on how to prevent or detect fraud (ACAP, Final Report of the Advisory Committee on the Auditing Profession, United States Department of the Treasury, Washington, DC, 2008; AICPA, SAS No. 99: Consideration of Fraud in a Financial Statement Audit, New York, NY, 2002; Carcello et al., Working Paper, University of Tennessee, Bentley University and Kennesaw State University, 2008; Wells, Journal of Accountancy, 2004), we develop a framework that identifies three psychological pathways to fraud, supported by multiple theories relating to moral intuition and disengagement, rationalization, and the role played by negative affect. The purpose of developing the framework is twofold: (1) to draw attention to important yet under-researched aspects of ethical decision-making, and (2) to increase our understanding of the psychology of committing fraud. Our framework builds on the existing fraud triangle (PCAOB, Consideration of fraud in a financial statement audit. AU Section 316, , 2005) which is used by auditors to assess fraud risk. The fraud triangle is composed of three factors that, together, predict the likelihood of fraud within an organization: opportunity, incentive/pressure, and attitude/rationalization. We find that, when faced with the opportunity and incentive/pressure, there are three psychological pathways to fraud nestled within attitude/rationalization: (1) lack of awareness, (2) intuition coupled with rationalization, and (3) reasoning. These distinctions are important for fraud prevention because each of these paths is driven by a different psychological mechanism. This framework is useful in a number of ways. First, it identifies certain insidious situational factors in which individuals commit fraud without recognizing it. Second, it extends our knowledge of rationalization by theorizing that individuals use rationalization to avoid or reduce the negative affect that accompanies performing an unethical behavior. Negative affect is important because individuals wish to avoid it. Third, it identifies several other methods fraudsters use to reduce negative affect, each of which could serve as potential “psychological red flags” and helps predict future fraudulent behavior. Finally, our framework can be used as a theoretical foundation to explore several interventions designed to prevent fraud.     

Alignment or entrenchment? Corporate governance and cash holdings in growing firms

This study contends that the association between corporate cash holdings and corporate governance is subject to the investment environments that firms face. For example, firms with an abundance of investment opportunities have a strong incentive to hold cash in order to maintain their competitive positions. Shareholders accept high levels of cash holdings in such growing firms if corporate governance can protect their interests. This study examines the effects of corporate governance on cash holdings for a sample of high-tech firms. The results show that CEO ownership, the directorship of venture capitalists (VCs), and independent directors play critical roles in corporate cash policy. In addition, the boards are more effective when the firms' CEOs are also their founders or when VCs hold a large stake of company shares. The effects of corporate governance are more significant in younger firms while the effects of firm-specific economic variables are more significant in older firms in the sample.     

Corporate Directors and Social Responsibility: Ethics versus Shareholder Value

This paper reports on the results of an experiment conducted with experienced corporate directors. The study findings indicate that directors employ prospective rationality cognition, and they sometimes make decisions that emphasize legal defensibility at the expense of personal ethics and social responsibility. Directors recognize the ethical and social implications of their decisions, but they believe that current corporate law requires them to pursue legal courses of action that maximize shareholder value. The results suggest that additional ethics education will have little influence on the decisions of many business leaders because their decisions are driven by corporate law, rather than personal ethics. Jacob Rose is Associate Professor at Southern Illinois University Carbondale. His research emphasizes judgment and decision making in accounting and governance contexts.     

Exporting an Inherently Harmful Product: The Marketing of Virginia Slims Cigarettes in the United States,Japan, and Korea

In recent years, and in close connection with a number of well-known financial malpractice cases, public debate on business ethics has intensified worldwide, and particularly in ethics-unfriendly environments, such as Spain, with many recent fraud and corruption scandals. In the context of growing consensus on the need of balancing social prosperity and business profits, concern is increasing for introducing business (and particularly accounting) ethics in higher education curricula. The purpose is to improve ethical behaviour of future business people, and of accounting professionals in particular. In this study, from a sample of 551 business students at a Spanish university, the importance of accounting ethics is investigated. The aim of this paper is twofold. First, we attempt to examine students’ overall perceptions of business ethics in unfriendly environments and, specifically, their views on the importance and goals of accounting ethics education. Second, we intend to investigate whether potential differences in such perceptions depend on previous business ethics courses taken, gender, and age of students. Our results show that those students who have previously taken an ethics course are especially prone to considering that accounting education should include ethical considerations, and show greater interest in further introducing this subject in their curricula. These facts should encourage universities offering business degrees in ethics-unfriendly environments to extend the implementation of ethics courses in their curricula. Besides, significant differences in students’ perceptions on the importance of accounting ethics are found depending on their gender and age. In line with previous research findings, female and older students show more ethical inclinations than, respectively, male and younger students. Thus, ethics-unfriendly environments can be treated as contexts where general trends on students’ ethical attitudes are also clearly visible. This fact, together with the evidenced impact of ethics courses on students’ ethical inclinations, places ethics-unfriendly environments as crucial research settings for further inquiring into the nuances that help explain students’ attitudes towards accounting ethics and the role of ethics courses in business degree curricula.     

Corporate Identity,Ethics and Reputation in Supplier–Buyer Relationships

Multi-national corporations (MNCs) have been criticised for not behaving ethically in some situations, which could have a negative effect on their reputation. This study examines the ethics of a large MNC in its relationship with its suppliers. A brief literature review of corporate identity, business ethics and buyer–supplier relationships is undertaken. The views and perceptions of the buying staff and the suppliers to a large South African MNC are obtained and discussed. The results indicate that this MNC has a good corporate reputation among both its suppliers (an important stakeholder) and its own buying department. The existence and implementation of formal codes of ethics was found to be a necessary, but not sufficient condition for good ethical practice. Candid relationships with suppliers emerged as a second and important factor. Ethical perceptions of buyers by suppliers are driven by the management of corporate identity, through the elements of ethical standards and candid relationships. We present a model of corporate identity/reputation in Buyer–Supplier Relationships. Michael Bendixen is a Professor of Research Methodology and Statistics at the H. Wayne Huizenga School of Business at Nova Southeastern University, Florida. His research interests include business ethics, governance and culture. His articles have appeared in the European Journal of Marketing, Industrial Marketing Management, Journal of Business Research, Journal of International Business Studies and Journal of Marketing Management amongst others. Russell Abratt is a Professor of Marketing at the H. Wayne Huizenga School of Business at Nova Southeastern University, Florida. His research interests include corporate identity management and business ethics. His articles have appeared in the Journal of Business Ethics, Journal of Business and Psychology, European Journal of Marketing, Journal of Marketing Management, Industrial Marketing Management, and Business Horizons amongst others.