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Legal Deterrence: the foundation of corporate governance - evidence from China

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  • Zhong Zhang

Abstract

To evaluate the Chinese government's recent market-orientated efforts to promote good corporate governance, this paper conducts a re-examination of the working mechanics for market competition and other market-based governance mechanisms to ensure good corporate governance. The finding is that the utility of market mechanisms may have been exaggerated. Not only are they not effective in disciplining serious managerial misbehaviour that offers managers more gain than loss, even their limited value to discourage such misbehaviour as managerial shirking is conditioned on that the opportunities for illegitimate enrichment by managers are few. On the contrary, legal sanction is fundamental to good corporate governance, because it is the only feasible way to combat such serious misbehaviour and curb illegitimate enrichment. Current experience of corporate governance in China conforms to this finding and poor corporate governance in China is better explained by the lack of credible legal deterrence. This being the case, the top priority for China is to strengthen legal sanction in order to rein in the excessive misappropriation and flagrant fraud. Only once this has been done will the efforts to implement market-orientated reforms bear any significant fruits. Copyright (c) 2007 The Author; Journal compilation (c) 2007 Blackwell Publishing Ltd.

Suggested Citation

  • Zhong Zhang, 2007. "Legal Deterrence: the foundation of corporate governance - evidence from China," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(5), pages 741-767, September.
  • Handle: RePEc:bla:corgov:v:15:y:2007:i:5:p:741-767
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    References listed on IDEAS

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    1. Cheffins, Brian R., 1997. "Company Law: Theory, Structure and Operation," OUP Catalogue, Oxford University Press, number 9780198764694.
    2. Hoff, Karla & Stiglitz, Joseph E., 2005. "The creation of the rule of law and the legitimacy of property rights : the political and economic consequences of a corrupt privatization," Policy Research Working Paper Series 3779, The World Bank.
    3. Stoyan Tenev & Chunlin Zhang & Loup Brefort, 2002. "Corporate Governance and Enterprise Reform in China : Building the Institutions of Modern Markets," World Bank Publications, The World Bank, number 15237.
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    Cited by:

    1. Reyes Calderón & José Álvarez-Arce & Silvia Mayoral, 2009. "Corporation as a Crucial Ally Against Corruption," Journal of Business Ethics, Springer, vol. 87(1), pages 319-332, April.
    2. Kling, Gerhard & Weitzel, Utz, 2011. "The internationalization of Chinese companies: Firm characteristics, industry effects and corporate governance," Research in International Business and Finance, Elsevier, vol. 25(3), pages 357-372, September.
    3. Wei Huang, 2016. "Tunneling through related-party loan guarantees: evidence from a quasi-experiment in China," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 857-884, October.

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