State ownership and securities fraud: A political governance perspective

Research question/issue: This study attempts to shed new light on how the state as a controlling shareholder can affect the interests of minority shareholders by investigating the role of state ownership in deterring securities fraud commission. Research findings/insights: Using archival data from a large sample of Chinese publicly traded firms, we uncover that state ownership is negatively associated with the likelihood of securities fraud commission. Further, CEO political background reinforces this negative relationship. We also uncover that firms with high state ownership are more likely to dismiss CEOs than those with low or no state ownership upon securities fraud detection. Theoretical/academic implications: Departing from agency theory-centric research on state ownership and corporate governance, this study introduces a political governance perspective to unpack the role of state ownership in corporate governance. Political governance refers to organizational control mechanisms deployed by political actors to achieve their objectives. Practitioner/policy implications: Studying how political governance systems influence managerial behaviors is critical to gaining a complete insight into the implications of state ownership on corporate governance.