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Financial Fraud, Corporate Value and Outside Director Reputation

Author: WeiXu
Tutor: TangXueSong
School: Southwestern University of Finance and Economics
Course: Accounting
Keywords: Financial Fraud Corporate Governance Independent Directors reputation
CLC: F832.51
Type: Master's thesis
Year: 2011
Downloads: 167
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Abstract

Traditional corporate governance structure of the defects causing agent opportunism and internal control problems, major shareholders or managers the right to control the use of the hands to grab the interests of listed companies, in order to hinder the adverse information they convey to the market, the most direct way is financial fraud. In recent years, the frequent financial scandals have greatly undermined investor enthusiasm, but also impede the pace of development of China's capital market. In order to improve the quality of accounting information, to protect the interests of small investors, China began a series of measures to improve corporate governance. 2001 be regarded as a major initiative to improve the corporate governance system of independent directors formally introduced. Since the implementation of concern, scholars have tried to find evidence of an effective system of independent directors, were effects from the implementation of the independent director system, the remuneration of independent directors, independent, professional, occupational background, personal characteristics and performance of the company or the company's accounting information The quality of the relationship, the independent directors of replacement reason analysis to do some exploring. Studies have shown that the implementation of the independent director system in China is not satisfactory. Independent directors become \How to encourage independent directors to actively perform their duties to the problems to be solved. Usually considered independent directors constraint mechanism is divided into the following three: the economic constraints, legal constraints, and reputation constraints. Prevent independent directors of listed companies from a practical point of view, in order to guarantee the independence of the independent directors, the interests involved, China is not in favor of the implementation of incentive stock options of the independent directors as an independent director, are often practitioners and theorists elite, independent directors a fixed allowance for them insignificant, only sideline only economic constraints are not established. Too strict liability provisions, make independent directors worry too much about the performance of their duties risk and fear fear hands feet, hinder the commercial development of legally binding means there are limitations. Look at the implementation of the independent director system more successful countries from abroad, the reputation constraint is regarded as a valid approach, independent directors achievement motivation of the decision-making expert reputation, which will conscientiously perform their duties in order to enhance the reputation. Theory, the independent director system established under the principal-agent theory problems, the introduction of independent directors to supervise the agent to reduce agency costs. Between the independent directors and shareholders is also an agency relationship, the independent directors opportunist motives and behavior, this interpretation of the independent directors not as good. However, the the modern butler theory and incentive theory of constraints, the agent's conduct is not only driven by economic interests, but also by personal psychological factors, they will work hard for the social sense of honor and a sense of accomplishment. Theory based on the reputation of the independent directors, independent directors perform their duties behavior will affect their reputation, once dereliction of duty, they will have to pay the reputation costs, reputation punishment constraints were they better perform their duties. Seen, either in theory or practice, reputation incentives are constrained effective exercise of independent directors. In order to explore the effectiveness of the mechanisms of the reputation of the independent directors, the paper selects listed companies 2001-2005 Regulatory Entities fraud, and on this basis, manually collect the personal information of the independent directors of the fraud company, including the qualifications of independent directors, age, profession, fraud whether working in the Audit Committee, whether the fraud announcement publicly criticized corrupt companies and chain departure fraud announcement. Learn from other literature to represent the value of the company stock price changes in the value of the company, as non-normal rate of return of the stock market model, fraud the bulletin (-71, -11) estimation window, fraud announcement (- 10, 10) for the event window, respectively, calculated corrupt companies and chain cumulative abnormal return on the stock of the company the fraud announcement (-10,10). Study listed companies financial fraud by the regulatory body of the announcement within three years of the change of the independent directors' reputation as well as the reputation of change of company value chains. This paper envisaged, indolent in corrupt conduct of the exercise, failure to supervise the company's independent directors when the fraud companies were punished by the regulatory bodies, the independent directors should be subjected to the reputation of punishment: on the one hand, will affect their representation in the company of fraud, and the other the on the one hand will affect them in part-time representation of the company's opportunities. The same time, investors will not trust such independent directors serving companies, resulting in the impairment of the company's value chain. The paper is divided into seven parts: the first chapter, Introduction. Basic problem of this research background, the significance of the topic, research purpose, research methods and research ideas. Chapter II, Literature Review and Commentary. Including: financial fraud and the value of the company, financial fraud and corporate governance, financial fraud and the relationship of the independent director system, financial fraud with the independent directors of the reputation of the relationship as well as independent directors leaving the impact factors related literature review, the final summary of this overview. Chapter institutional background. Respectively, the powers and responsibilities of the emergence and development of the system of independent directors, independent directors, independent directors to run the system environmental differences, as well as the independent director system and financial information quality. Chapter IV, the theoretical analysis and hypotheses. The basis of the theoretical analysis of the theoretical basis for the emergence and development of the independent director system and the effective exercise of independent directors, respectively, for the later empirical results provide a theoretical basis and assumptions based on this research. Chapter empirical research design. The sample selection, the design of the variable, the relevant design of the model and the empirical results to make described. Chapter VI, the empirical findings. Summarizes the empirical findings and policy recommendations. Chapter VII, research and future prospects. Proposed limitations on the study design and variable selection, outlook and future research directions. Found through empirical research, the independent directors reputation mechanism is effective to some extent, the reputation of the independent directors will affect the value of the human capital of the independent directors, but not enough to affect the value of the company. Occurred the reputation of the independent directors of the financial fraud will have a negative impact: (1) fraud announcement, responsible for independent directors not only occur in the positions of the fraud company non-normal turnover, will lose more part-time jobs, but before the announcement of individual more independent directors in the number of posts net loss after fraud announcement number more. (2) fraud occurs representation Audit Committee of independent directors on the fraud to assume greater responsibility for the fraud announcement, the independent directors such as loss of reputation is more serious, you will lose more part-time opportunities. (3) fraud announcement, the independent directors of the regulatory agencies openly criticized the independent directors of the defaulting signal more clearly convey to the market, such independent directors will leave the the fraud company lost more part-time jobs. (4) fraud caused by the impairment of the company's reputation and value will affect the representation of independent directors select, they are more inclined to leave the company of poor performance and \However, no direct evidence, the of fraud events on the change of the independent directors' reputation will significantly affect the value of the chain. Partly because many influencing factors of the value of the company, will interfere with the observed results. The other hand, because of the the Independent Directors reputation is still relatively weak, not enough to cause larger changes in value of the company. Visible, the existence of an effective human capital market, to market to judge the performance of duties of independent directors elected independent directors, the company will make reference to the views of the market and the record of the performance of their duties of independent directors. However, the entire market has not yet fully attach importance to the role of independent directors, and investors on the value of the company will not significantly change occurred because of the change of independent directors reputation. In addition, this paper analyzed through descriptive statistics found that early separation and responsibilities independent directors lose more than the job and responsibility of independent directors, part-time jobs, early separation of independent directors still be market identification, in addition to a higher the reputation of punishment. From three aspects of innovation research perspective is based on the consequences of perspective to investigate the validity of the reputation of the independent directors in the country is the first of its kind. Second, research methods, due to financial fraud occurred and announcement existence time difference may be the independent directors at the time of financial fraud office, exposed when already leaving, but he should be for financial fraud behavior is responsible, is also possible that the independent directors in the financial fraud occurred before serving, but expose-the-job, he has no responsibility. Empirical Analysis of these mixed together, is bound to result in chaos. So this article will be independent directors classification study are: independent directors responsible for leaving, independent directors have responsibilities and working and independent directors serving no responsibility and. Research financial frauds of the independent directors of the different types of reputation at home and abroad, which are the first of its kind. Third, the research on the innovation, this paper for the first time to find evidence of the reputation mechanism in our independent directors effective to some extent. The study shows that the reputation of independent directors will affect the value of the human capital of the independent directors, fraud will reduce the reputation of independent directors, thus greatly reducing the class independent directors serving opportunity, but not enough to cause the change of independent directors reputation investor concurrently The company's value judgments. Based on empirical findings, we propose to continuously improve the independent director system, give full play to the reputation incentive and restrictive role of independent directors, and to strengthen the policy recommendations of the Audit Committee functions, and pointed out that the design of the study due to variable selection and information disclosure as a result of the limitations of Looking to the future direction of research.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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