The Bright Side of Controlling Shareholders in Emerging Markets: The Case of Corporate Fraud

This paper examines the effects of controlling shareholders on corporate fraud. Using a sample of Chinese listed firms for 2004-2019, we find that the absence of an ultimate controlling shareholder increases the risk of corporate fraud. We use an instrumental variable approach to alleviate the potential endogeneity issue and test a sample of firms experiencing a loss of control shareholders to provide supporting evidence. We further discuss possible mechanisms involved. We find that in the absence of controlling shareholders, fraud is mainly conducted by blockholders, and firms with more dispersed ownership are more likely to be affected. External monitoring, such as analyst coverage and institutional ownership, helps mitigate the association. Our results shed light on the positive role of controlling shareholders in restricting the expropriation of other blockholders in emerging markets where external governance is weak.