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Does the external monitoring effect of financial analysts deter corporate fraud in China?

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    Rights statement: © Chen, J., Cumming, D., Hou, W., & Lee, E. (2014). Does the external monitoring effect of financial analysts deter corporate fraud in China?. Journal of Business Ethics. 10.1007/s10551-014-2393-3

    Accepted author manuscript, 801 KB, PDF-document

http://download.springer.com/static/pdf/720/art%253A10.1007%252Fs10551-014-2393-3.pdf?auth66=1418397431_38c13e792b95779168c364f81bb17459&ext=.pdf
Original languageEnglish
JournalJournal of Business Ethics
Early online date19 Sep 2014
DOIs
StatePublished - 2014

Abstract

We examine whether analyst coverage influence 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 to discourage managerial misconduct, which can moderate agency problems. On the other hand, analysts may increase the fraud incentive factor by pressuring 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 (NSOEs), 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 analyst profession in emerging economies may benefit investors and strengthen business ethics.

    Research areas

  • fraud triangle, corporate fraud, agency problem, analyst coverage, China

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