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

Jiandong Chen, Douglas Cumming, Wenxuan Hou and Edward Lee
Additional contact information
Jiandong Chen: Southwestern University of Finance and Economics
Edward Lee: The University of Manchester

Journal of Business Ethics, 2016, vol. 134, issue 4, No 13, 727-742

Abstract: Abstract 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.

Keywords: Fraud triangle; Corporate fraud; Agency problem; Analyst coverage; China (search for similar items in EconPapers)
JEL-codes: G32 P37 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (69)

Downloads: (external link)
http://link.springer.com/10.1007/s10551-014-2393-3 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jbuset:v:134:y:2016:i:4:d:10.1007_s10551-014-2393-3

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10551/PS2

DOI: 10.1007/s10551-014-2393-3

Access Statistics for this article

Journal of Business Ethics is currently edited by Michelle Greenwood and R. Edward Freeman

More articles in Journal of Business Ethics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().