IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v64y2024ics1544612324005361.html
   My bibliography  Save this article

Reforming private securities litigation in China: Does private enforcement by minority shareholders matter to corporate fraud?

Author

Listed:
  • Li, Lu
  • Zheng, Gaoping
  • Zhong, Angel

Abstract

Leveraging the pilot initiative on the diversified resolution mechanism for private securities litigation in China, our study explores the impact of private securities litigation by minority shareholders on corporate fraud. Employing a difference-in-differences analysis over the period 2010–2018, we observe a substantial reduction of 16.4 % in corporate fraud. This effect is particularly pronounced in companies with political connections and those characterized by weaker internal governance structures. Further analysis indicates a diminishing gap in corporate fraud between pilot and non-pilot firms after the nationwide expansion of the pilot program. These findings carry significant policy implications, particularly for emerging markets seeking to enhance protection for minority shareholders.

Suggested Citation

  • Li, Lu & Zheng, Gaoping & Zhong, Angel, 2024. "Reforming private securities litigation in China: Does private enforcement by minority shareholders matter to corporate fraud?," Finance Research Letters, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:finlet:v:64:y:2024:i:c:s1544612324005361
    DOI: 10.1016/j.frl.2024.105506
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612324005361
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2024.105506?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting out Tunneling: An Application to Indian Business Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 121-148.
    2. Chen, Gongmeng & Firth, Michael & Gao, Daniel N. & Rui, Oliver M., 2005. "Is China's securities regulatory agency a toothless tiger? Evidence from enforcement actions," Journal of Accounting and Public Policy, Elsevier, vol. 24(6), pages 451-488.
    3. Hutton, Amy & Shu, Susan & Zheng, Xin, 2022. "Regulatory transparency and the alignment of private and public enforcement: Evidence from the public disclosure of SEC comment letters," Journal of Financial Economics, Elsevier, vol. 145(1), pages 297-321.
    4. McTier, Brian C. & Wald, John K., 2011. "The causes and consequences of securities class action litigation," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 649-665, June.
    5. Han, Han & Zhao, Xueqing & Wang, Zhibin, 2023. "The effect of stock pledge on corporate fraudulence: Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    6. Koh, Ping-Sheng, 2007. "Institutional investor type, earnings management and benchmark beaters," Journal of Accounting and Public Policy, Elsevier, vol. 26(3), pages 267-299.
    7. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    8. Romano, Roberta, 1991. "The Shareholder Suit: Litigation without Foundation?," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(1), pages 55-87, Spring.
    9. Arena, Matteo P. & Wang, Bin & Yang, Rong, 2021. "Securities litigation and corporate tax avoidance," Journal of Corporate Finance, Elsevier, vol. 66(C).
    10. Wang, Zhibin & Li, Zelei, 2023. "Does minority shareholder activism enhance corporate innovation? Evidence from China," Finance Research Letters, Elsevier, vol. 54(C).
    11. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    12. Ge, Wenxia & Ouyang, Caiyue & Shi, Zhenyang & Chen, Zhanliao, 2022. "Can a not-for-profit minority institutional shareholder make a big difference in corporate governance? A quasi-natural experiment," Journal of Corporate Finance, Elsevier, vol. 72(C).
    13. Kenny Z. Lin & Lillian F. Mills & Fang Zhang & Yongbo Li, 2018. "Do Political Connections Weaken Tax Enforcement Effectiveness?," Contemporary Accounting Research, John Wiley & Sons, vol. 35(4), pages 1941-1972, December.
    14. Jiabing Lv & Yong Ye & Runmei Luo, 2023. "The power of minority shareholders: evidence from voting on the related party transaction proposals in China," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 22(2), pages 157-176, January.
    15. Tracy Yue Wang & Andrew Winton & Xiaoyun Yu, 2010. "Corporate Fraud and Business Conditions: Evidence from IPOs," Journal of Finance, American Finance Association, vol. 65(6), pages 2255-2292, December.
    16. Fich, Eliezer M. & Shivdasani, Anil, 2007. "Financial fraud, director reputation, and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 86(2), pages 306-336, November.
    17. Yinju Nie & Ming Jia, 2021. "The power of crowds: can minority shareholder activism promote management earnings forecast accuracy," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(5), pages 6333-6385, December.
    18. Chen, Jiamin & Fan, Yaoyao & Zhang, Xuezhi, 2022. "Rookie independent directors and corporate fraud in China," Finance Research Letters, Elsevier, vol. 46(PB).
    19. Vikramaditya Khanna & E. Han Kim & Yao Lu, 2015. "CEO Connectedness and Corporate Fraud," Journal of Finance, American Finance Association, vol. 70(3), pages 1203-1252, June.
    20. Lin, Jing & Li, Fang & Zheng, Steven Xiaofan & Zhou, Mingshan, 2023. "Minority shareholder voting and dividend policy," Journal of Banking & Finance, Elsevier, vol. 148(C).
    21. Chen, Donghua & Chen, Yinying & Li, Oliver Zhen & Ni, Chenkai, 2018. "Foreign residency rights and corporate fraud," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 142-163.
    22. Huang, Fumian & Ge, Liming & Wu, Sirui, 2023. "Minority shareholder protection, corporate governance, and investment efficiency," Finance Research Letters, Elsevier, vol. 58(PC).
    23. Banerjee, Suman & Humphery-Jenner, Mark & Nanda, Vikram & Tham, Mandy, 2018. "Executive Overconfidence and Securities Class Actions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(6), pages 2685-2719, December.
    24. Xu, Wenming, 2016. "Reforming private securities litigation in China: The stock market has already cast its vote," International Review of Law and Economics, Elsevier, vol. 45(C), pages 23-32.
    25. Alan D. Crane & Andrew Koch, 2018. "Shareholder Litigation and Ownership Structure: Evidence from a Natural Experiment," Management Science, INFORMS, vol. 64(1), pages 5-23, January.
    26. Jennifer Francis & Allen H. Huang & Shivaram Rajgopal & Amy Y. Zang, 2008. "CEO Reputation and Earnings Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 25(1), pages 109-147, March.
    27. Lin Peng & Ailsa Roell, 2008. "Manipulation and Equity-Based Compensation," American Economic Review, American Economic Association, vol. 98(2), pages 285-290, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Huilin Zhang & Xiaoran Ni & Qi Jin, 2023. "Litigating crashes? Insights from security class actions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 2935-2963, September.
    2. Xibo Zhao & Dan Yang & Zhengguang Li & Lynda Song, 2021. "Multiple large shareholders and corporate fraud: evidence from China," Frontiers of Business Research in China, Springer, vol. 15(1), pages 1-21, December.
    3. Dan Amiram & Zahn Bozanic & James D. Cox & Quentin Dupont & Jonathan M. Karpoff & Richard Sloan, 2018. "Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature," Review of Accounting Studies, Springer, vol. 23(2), pages 732-783, June.
    4. Chen, Yunyan & Wu, Shinong & Zhou, Yucheng & Huo, Di, 2023. "Gambling culture and corporate violations: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    5. Kuang, Yu Flora & Lee, Gladys, 2017. "Corporate fraud and external social connectedness of independent directors," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 401-427.
    6. Han, Han & Zhao, Xueqing & Wang, Zhibin, 2023. "The effect of stock pledge on corporate fraudulence: Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    7. Ge, Wenxia & Ouyang, Caiyue & Shi, Zhenyang & Chen, Zhanliao, 2022. "Can a not-for-profit minority institutional shareholder make a big difference in corporate governance? A quasi-natural experiment," Journal of Corporate Finance, Elsevier, vol. 72(C).
    8. Anutchanat Jaroenjitrkam & Sirimon Treepongkaruna & Pornsit Jiraporn, 2022. "Does shareholder litigation risk promote or hinder corporate social responsibility? A quasi‐natural experiment," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(3), pages 657-674, May.
    9. Abdul Ghafoor & Rozaimah Zainudin & Nurul Shahnaz Mahdzan, 2019. "Factors Eliciting Corporate Fraud in Emerging Markets: Case of Firms Subject to Enforcement Actions in Malaysia," Journal of Business Ethics, Springer, vol. 160(2), pages 587-608, December.
    10. Chung, Chune Young & Kim, Incheol & Rabarison, Monika K. & To, Thomas Y. & Wu, Eliza, 2020. "Shareholder litigation rights and corporate acquisitions," Journal of Corporate Finance, Elsevier, vol. 62(C).
    11. Imen Derouiche & Majdi Hassan & Sarra Amdouni, 2018. "Ownership structure and investment-cash flow sensitivity," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(1), pages 31-54, March.
    12. Bansal, Shashank & Thenmozhi, M., 2020. "Does Concentrated Founder Ownership Affect Related Party Transactions? Evidence from an Emerging Economy," Research in International Business and Finance, Elsevier, vol. 53(C).
    13. Colonnelli, Emanuele & Lagaras, Spyridon & Ponticelli, Jacopo & Prem, Mounu & Tsoutsoura, Margarita, 2022. "Revealing corruption: Firm and worker level evidence from Brazil," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1097-1119.
    14. Jang, Hasung & Kang, Hyung-cheol & Park, Kyung Suh, 2005. "Determinants of Family Ownership: The Choice between Control and Performance," CEI Working Paper Series 2005-5, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    15. Randall Morck & Bernard Yeung, 2003. "Agency Problems in Large Family Business Groups," Entrepreneurship Theory and Practice, , vol. 27(4), pages 367-382, October.
    16. Jian Zhang, 2018. "Public Governance and Corporate Fraud: Evidence from the Recent Anti-corruption Campaign in China," Journal of Business Ethics, Springer, vol. 148(2), pages 375-396, March.
    17. Islam, Emdad & Rahman, Lubna, 2023. "Shades of grey: Risk-related agency conflicts and corporate innovation," Journal of Corporate Finance, Elsevier, vol. 83(C).
    18. Sabri Boubaker & Hind Sami, 2011. "Multiple large shareholders and earnings informativeness," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 10(3), pages 246-266, August.
    19. Erik Berglöf & Mike Burkart, 2003. "European takeover regulation [‘Efficient and inefficient sales of corporate control’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(36), pages 171-213.
    20. Naeem Tabassum & Satwinder Singh, 2020. "Corporate Governance and Organisational Performance," Springer Books, Springer, number 978-3-030-48527-6, January.

    More about this item

    Keywords

    Private securities litigation; Minority shareholders; Corporate fraud; Corporate governance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:64:y:2024:i:c:s1544612324005361. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.