The thesis aims to examine the causes and consequences of accounting fraud in Chinese listed firms between 2007 and 2014. This is important to market participants as the reliability of the financial reporting information affects their investment decisions. To achieve the aim, three main research questions are identified: including examining (i) recidivist fraudulent financial reporting, punishments and their association with institutional factors; (ii) the impact of different punishments for fraud on shareholder valuation of listed firms; (iii) the relationship between mutual fund investments and accounting fraud.
The thesis reports a high level of recidivism in accounting fraud with firms employing many fraud techniques simultaneously and repeatedly. Punishments increase with repeated offending and significant differences exist between different punishments and reoffending. The occurrence of recidivism is associated with a range of regulatory and institutional factors i.e. the self-regulatory measures do not prevent firms from recidivism, whereas firms with large proportion of institutional and state ownership are less likely to reoffend. Then, the thesis examines the effectiveness of punishments. It is
reported investors perceive punishments involving monetary penalties more severely than non-monetary punishments. Stock market reactions are sensitive to the type of fraud committed with manipulation of income statements viewed more negatively by investors than fraud related to disclosure. Information leakage to capital markets prior to the announcement of punishments is also observed. Informed investors perceive fines to be more effective than ‘name and shame’ punishments used to combat fraud. To constrain and deter accounting fraud, the thesis suggests the development of mutual fund investment in corporate ownership structure, as mutual funds have significantly higher levels of fraud detection, reducing firms’ propensity to engage in fraud. Open-end
mutual funds outperform closed-end mutual funds in detecting fraud and reducing fraud commission; redeemable shares are also viewed to exert discipline on managers. This impact of mutual funds is moderated by the state ownership of listed firms: mutual funds cannot effectively detect fraud in firms with a state-owned background.