The bright side of controlling owners in emerging markets: the case of corporate fraud

This paper sheds light on the monitoring effects of controlling ownership on shareholders’ fraud activities. Using a sample of Chinese listed firms for 2004–2019, our results indicate that the absence of controlling owners increases corporate fraud activities by non-controlling shareholders, but not by managers. The findings remain consistent when using bivariate probit model that incorporates undetected fraud. To establish causality, we conduct difference-in-difference analyses that rely on the ownership variation generated by the exogenous loss of controlling owners and M&A deregulation shocks, respectively. The 2SLS regression employing the collectivist culture as an instrument for control absence confirms our results. To explore the reasons for the increase in fraud due to the absence of controlling owners, we show that shareholders are not motivated to participate and vote in the general meetings when controlling owners are absent, resulting in lower corporate governance quality. However, analysts and short-sellers act effectively as external control mechanisms to prevent corporate fraud when controlling owners are absent.