Institutional Investors, Political Connections and Incidence of Corporate Fraud

• Wu, Wenfeng 
• Johan, Sofia A. 
• Rui, Oliver Meng 

Abstract

In　this　study,　we　analyze　two　new　potential　determinants　for　mitigating　fraud　committed　by　firms:　institutional　investors　and　political　connection.　The　role　of　institutional　investors　in　the　effective　monitoring　of　firm　management　has　also　been　well　established　and　we　in　turn　observe　that　firms　with　a　large　proportion　of　institutional　investors　have　lower　incidences　of　corporate　fraud.　The　importance　of　political　connection　for　enterprise　in　both　developed　and　emerging　markets　such　as　the　United　States　and　China　has　also　been　established　by　prior　studies.　We　find　in　this　paper　that　it　is　possible　to　identify　another　positive　effect　on　enterprise　in　that　political　connection　could　reduce　incidences　of　corporate　fraud,　thus　providing　value　to　firms.　We　further　find　that　political　connection　plays　more　pronounced　role　in　reducing　the　incidence　of　regulatory　enforcement　against　non-state　owned　enterprises　in　weaker　legal　environments,　while　institutional　ownership　plays　a　more　important　role　in　reducing　the　incidence　of　regulatory　enforcement　against　state　owned　enterprises　in　weaker　legal　environments.

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