Fraud, Market Reaction, and Role of Institutional Investors in Chinese Listed Firms

July 14, 2013 Leave a comment

Fraud, Market Reaction, and Role of Institutional Investors in Chinese Listed Firms

Reena Aggarwal Georgetown University – Robert Emmett McDonough School of Business

May Hu Curtin University of Technology

Jingjing Yang Jiangxi Normal University

July 3, 2013

Abstract: 
We examine the extent of fraud and the type of financial fraud committed by listed firms in China, stock market reaction to the detection and announcement of fraud, the characteristics of firms committing fraud, and the association between institutional ownership and financial fraud. One of our objectives is to study the monitoring role of different types of institutional investors, such as mutual funds, pension funds and insurance companies. Using fraud data from the Chinese Securities Regulatory Commission between 2001 and 2011, we find wide occurrence of fraud, and a strong negative market reaction on the announcement date, particularly in cases of serious fraud. Fraud is more likely to take place at firms that have a smaller proportion of independent directors, and at poorly performing firms. We find firms with higher mutual fund ownership subsequently have fewer incidences of fraud. We do not find any association between ownership by grey financial institutions, such as insurance companies and pension funds that are likely to have business ties with firms, and future corporate fraud. Our results show that ownership by independent institutions, such as mutual funds, enhances corporate governance in Chinese capital markets, and serves as an effective monitoring mechanism.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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