Alternative Governance and Corporate Financial Fraud in Transition Economies: Evidence From China

Publication Type

Journal Article

Publication Date

9-2019

Abstract

How corporate governance mechanisms function in transition economies is a key topic for corporate governance researchers and policy makers. We propose that alternative governance mechanisms are in place to mitigate corporate fraudulent behaviors in the fluid state of transition economies where the establishment and enforcement of corporate governance legislation are presently insufficient. Drawing on the twin set of institutional logics-the institutional embeddedness logic and the institutional substitution logic-we posit that three salient types of prevailing alternative governance mechanisms (relational, administrative, and foreign governance) play important roles in transition economies because they are complementary to the institutional conditions at the time of the transition process. Conducting a bivariate probit analysis of a matched sample of corporate financial fraud cases in China, we find that strategic alliances, business group affiliation, nontradable state shares, local government ownership, use of foreign auditors, and foreign listing can deter corporate financial fraud, while foreign listing is also effective in detecting fraud. We also find that the deterrence effects of strategic alliances and business group affiliation become weaker as law development improves, while foreign listing and legal governance are completely substitutive. Our study provides a contextualized view of corporate governance that connects its effectiveness with institutionalization and the institutional state of a country. Our study also enriches our understanding of some unfamiliar forms of governance mechanisms that are in place and complementary to a country's institutional conditions.

Keywords

Corporate governance; Corporate fraud; Institutional embeddedness; Institutional substitution; China

Discipline

Corporate Finance | Finance and Financial Management

Research Areas

Strategy and Organisation

Publication

Journal of Management

Volume

45

Issue

7

First Page

2685

Last Page

2720

ISSN

0149-2063

Identifier

10.1177/0149206318764296

Publisher

SAGE Publications

Additional URL

https://doi.org/10.1177/0149206318764296

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