Mars–Venus marriage: State-owned shareholders and corporate fraud in private firms

Based on the institutional background of state-owned capital’s shareholding in non-state-owned enterprises(NSOEs) under China’s mixed-ownership reform, this paper studies whether state-owned shareholders can leverage their institutional advantages to affect the occurrence of fraud in NSOEs. Utilising a sample of A-share NSOE listed firms in China from 2008 to 2021, we discover a significant negative association between state-owned shareholders and the likelihood of fraud in NSOEs. State-owned shareholders act primarily as inhibitors of fraud, and their effect on the probability of fraud detection is not statistically significant. This finding remains robust even after conducting a series of sensitivity tests to mitigate potential endogeneity issues stemming from selectivity bias and reverse causality. In the analysis of heterogeneity, we find that state-owned shareholders play a more active role under conditions of imperfect macro institutional development, and they exert a more significant inhibitory effect on enterprises with lower governance levels and higher business risk. Our mechanism tests demonstrate that the inhibitory effect of state-owned shareholders on corporate fraud is achieved by improving corporate governance and alleviating financial distress. Overall, our study provides empirical evidence that state-owned shareholdings are associated with reduced fraudulent behaviour within NSOEs.