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Does Bank Monitoring Reduce Corporate Misreporting? Evidence from Foreign Bank Entry in China

Author

Listed:
  • Minwen Li

    (School of Economics and Management, Tsinghua University, Beijing 100084, China)

  • Tanakorn Makaew

    (Finance and Business Economics, University of Southern California, Los Angeles, California 90089)

  • Andrew Winton

    (Finance, University of Minnesota, Minneapolis, Minnesota 55455)

Abstract

We propose a model of bank monitoring and borrower financial misreporting. Using the staggered liberalization of the banking sector in China as a natural experiment, we find that, consistent with the model’s prediction, entry by more efficient foreign banks reduces corporate misreporting fraud. Fraud reduction is greatest among borrowers of foreign banks, but fraud also drops among borrowers of domestic banks, suggesting a spillover effect. As predicted by the model, fraud reduction is greatest for borrowers with higher levels of fixed assets or lower levels of current assets. Our evidence suggests that improved bank monitoring reduces financial misreporting.

Suggested Citation

  • Minwen Li & Tanakorn Makaew & Andrew Winton, 2025. "Does Bank Monitoring Reduce Corporate Misreporting? Evidence from Foreign Bank Entry in China," Management Science, INFORMS, vol. 71(5), pages 4223-4245, May.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:5:p:4223-4245
    DOI: 10.1287/mnsc.2022.02414
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