The effects of corporate governance and managerial compensation on financial fraud: Evidence from China

Abstract

The purpose of this study is to examine whether financial crises influence the effects of manager market competition and cash compensation on the likelihood of listed firms’ fraudulent financial reporting in China. We use a logistic regression model to analyze a very large sample of 1,088 Chinese listed firms from 2008 to 2018. The main findings are as follows: first, manager market competition is negatively associated with the probability of committing fraud. Second, managers’ cash compensation is negatively related to the likelihood of financial fraud. These findings suggest that (1) strong manager market competition can regulate Chinese top managers effectively; (2) higher cash compensation and a good governance mechanism can encourage top managers to deter financial fraud.