Government decentralisation and corporate fraud: Evidence from listed state-owned enterprises in China

This paper examines the economic consequences of government decentralisation from the perspective of corporate fraud. Theoretically, government decentralisation reduces the political costs of state intervention and hence decreases the probability of state-owned enterprises (SOEs) to engage in fraud. It also aggravates the agency costs (the costs of managerial self-dealing), thereby increasing the probability of SOEs to commit fraud. Using pyramidal layers as a proxy of government decentralisation for SOEs, empirical results show that government decentralisation significantly lowers the probability of SOEs to commit fraud. Further categorisation of types of fraud shows that government decentralisation primarily deters disclosure-related fraud and market transaction-related fraud. Finally, the effect of decentralisation on corporate fraud is more pronounced for SOEs in which government intervention is more likely.