Regulator as a minority shareholder and corporate fraud: Quasi-natural experiment evidence from the pilot project of China Securities Investor Services Center

The China Securities Investor Services Centre (CSISC) is a unique governance mechanism in China, backed by the Chinese regulator. This institution holds 100 shares of each public firm in the pilot regions and monitors large shareholders by exercising its rights. Using a difference-in-difference (DID) methodology, the study investigates a sample of Chinese listed firms from 2013 to 2017 to evaluate the role of regulatory minority shareholders in curbing corporate fraud, yielding consistent and robust results. The findings of the mechanism tests indicate that CSISC shareholding significantly reduces the propensity for fraud while increasing the probability of fraud detection. The results of heterogeneity tests show that the effect of CSISC shareholdings on corporate fraud is more pronounced in firms with severe internal agency problems and poorer external governance environments. Additional analyses examine the impact of CSISC shareholdings on different types of corporate fraud and show that it significantly reduces disclosure and operational fraud. This research has important implications for improving minority shareholder protection in countries with concentrated ownership structures and for constraining corporate fraud.