Public Governance and Corporate Fraud: Evidence
from the Recent Anti-corruption Campaign in China
Received: 1 September 2015 / Accepted: 12 January 2016 / Published online: 20 January 2016
Ó Springer Science+Business Media Dordrecht 2016
Abstract Taking advantage of the China’s recent anti-
corruption campaign, we attempt to examine the effect of
public governance on a ﬁrm’s incentive to commit fraud.
Using enforcement actions data from the Chinese Securi-
ties Regulatory Commission (CSRC) from 2004 to 2014,
we ﬁnd that, due to enhanced public governance, ﬁrms are
less likely to commit fraud in the post-campaign period
than in the pre-campaign period. We further show that the
effect of public governance is more evident in privately
held listed ﬁrms, in ﬁrms with weak legal environment, and
in ﬁrms in areas with poor local economies. In addition, we
ﬁnd that older CEOs respond less actively to the public
governance caused by anti-corruption regulations. This
paper offers clear policy implications for business ethics by
indicating that public governance provides external moni-
toring of corporate decisions.
Keywords Corporate fraud Á Anti-corruption Á Chinese
government Á Public governance
JEL Classiﬁcation G34
Several cross-country studies in the relevant literature show
that corporate decisions are signiﬁcantly inﬂuenced by
country-level institutional factors.
However, the cross-
country studies may have two problems: First, Fan et al.
(2008) argue that cross-country studies may be subject to
endogeneity problems, which may bias the results. Fan et al.
further contend that the potential endogeneity problems can
be alleviated by studying the effect of country-level insti-
tutional factors in a single country. Second, Allen et al.
(2005) argue that determining the assignment of weight for
each country in the cross-country studies may create poten-
tial problems since large diverse countries and small
homogeneous countries are different in culture and politics.
However, by examining the impact of public governance on
corporate fraud in China, we are able to effectively address
the concerns above by taking advantage of an exogenous
shock to institutional factors, i.e., the recent anti-corruption
campaign initiated by President Xi Jinping.
China provides a unique setting for us to conduct a per-
suasive examination of the effect of public governance on
corporate fraud. First, the ongoing anti-corruption campaign
initiated by President Xi Jinping in China serves as an
exogenous shock to public governance, thereby alleviating
potential endogeneity problems. The second challenge is the
insufﬁcient variation in institutional factors resulting from
institutional stability within a single country. The anti-cor-
ruption campaign in China meets this challenge by providing
variations in public governance, which thus enables us to
effectively investigate the effect of public governance within
one country. Third, unlike the U.S., the Chinese government
has discretion in implementing securities regulations and laws
(Li et al. 2014;Wuetal.2014). This feature allows public
& Jian Zhang
School of Finance, Southwestern University of Finance and
Economics, 555 Liutai Avenue, Wenjiang District,
Chengdu 611130, China
c¸-Kunt and Maksimovic (1998, 1999); Rajan and
Zingales (1995); Levine (1999); La Porta et al. (1997a, b, 1998,
1999b, 2000a, b); Booth et al. (2001); Beck and Levine (2002);
Giannetti (2003); Fan et al. (2012); La Porta et al. (1999a); Fan et al.
J Bus Ethics (2018) 148:375–396