The Continued Need for Diversity in Fraud Research

• Access throughyour institution

Full length article

Gender diversity and financial statement fraud☆

Abstract

This study investigates the role of gender diversity in fraud commission and detection with a view to identifying whether companies with more female corporate leaders are less likely to be involved in financial statement fraud. Using a bivariate probit model, the role of female corporate leaders in financial statement fraud commission and detection is examined for Chinese listed companies from 2007 to 2018. The representation of female corporate leaders increases the likelihood of fraud detection, thus reducing firms' propensity to engage in fraud. The finding confirms that women are risk averse and more committed to ethical practices than men in corporate leadership positions. Moreover, this impact of gender diversity is contingent upon the nature of ultimate controllers of listed companies: more female representation in top leadership roles can mitigate fraud commission or detect fraud effectively in non-state-owned enterprises, but not in state-owned enterprises. In addition, the recent anti-corruption campaign initiated by Chinese President Jinping Xi is a powerful form of public governance. Female corporate leaders play a more positive role in mitigating fraud commission and detecting fraud commission in the post-campaign period than in the pre-campaign period.

Introduction

Financial statement fraud has received wide attention from the public, the press and regulators. The high-profile scandals, such as Enron, Qwest and Lehman Brothers, triggered a decline in public trust in capital markets (Throckmorton et al., 2015). Being the world's second largest economy, China also had a series of financial statement fraud cases during the last decade, including Yin Guangxia, Ke Long, Lan Tian, and Liang Mianzhen, resulting in an unparalleled crisis of investors' confidence (Zhu and Gao, 2011). Now, financial statement fraud is a major concern for investors in China and the Chinese regulators face the severe challenge of addressing this misconduct.¹

Prior studies on fraud focus extensively on the factors contributing to fraud commission or detection. For instance, a smaller board of directors is less effective at monitoring managers (Sun et al., 2010). Firms with CEO duality increase the propensity to fraud (Chen et al., 2006). There is a lower likelihood of fraudulent financial reporting if financial reports are audited by the 'big four' accounting firms because the auditors are concerned about their reputation (Lennox and Pittman, 2010). Kuang and Lee (2017) find that with an increase in independent directors' connectedness, the likelihood of fraud detection decreases. As the likelihood of fraud commission is not equal to the likelihood of fraud detection, addressing the incomplete detection issue is important to the evaluation of corporate policies that are designed to reduce fraud.

Since the board of directors and supervisors are in charge of corporate governance and monitoring, researchers have examined the characteristics of corporate boards, including the influence of board gender diversity on corporate behaviors and firm performance. Literature shows that companies with more female corporate leaders have better firm performance and superior governance quality (Adams and Ferreira, 2009). Regulators are calling for more females in top leadership roles (Liu, 2018). These proposals generate a crucial need for a better understanding of the benefits of gender diversity in corporate monitoring and governance including addressing corporate fraud. However, very few studies have focused on the impact of female corporate leaders on financial statement fraud, especially in the context of emerging economies where little data on fraud is available to the public. This study aims to fill this gap by examining financial statement fraud in China, the largest emerging economy. The findings from China are expected to provide some practical and policy implications for other emerging economies.

The research context of this study is China, as the Chinese capital markets have been developing rapidly, yet female directors are still underrepresented. China has both the world's second largest capital markets and economy (World Bank, 2019). However, female participation is low on corporate boards; women make up only 10% of board directors and own a mere 0.1% of firms' stocks (Luo et al., 2017). Subsequently, examining the impact of female corporate leaders on fraud is important for designing policies to curb managers' opportunistic behaviors. Using a bivariate probit model, this study examines the impact of gender diversity on financial statement fraud in Chinese listed companies between 2007 and 2018. It shows that female corporate leaders are related to the higher rate of fraud detection, reducing firms' propensity to engage in fraud. Gender diversity improves financial reporting quality.

This study offers important contributions to the literature. First, it distinguishes the different impacts that female corporate leaders have on fraud commission and detection. The use of a bivariate probit model, which is more advanced and well-established compared to a single probit model, can overcome the problems of partial observability and mitigate biases caused by incomplete fraud detection. Previous studies only consider detected fraud cases (Stuart and Wang, 2016). Following Wang (2013), this study employs a more advanced method and considers both the determinants of fraud commission and detection.

Second, this study alleviates the ambiguity of the monitoring role of female corporate leaders. Although the presence of women in top leadership positions is often considered to enhance board independence, monitoring, advisory capacity and resource allocation, the existing empirical evidence is mixed (Zalata et al., 2018). Given the differences across studies, this paper finds that female corporate leaders are more capable of detecting potential fraudulent behaviors in China, a country characterized by an imperfect legal environment and a low enforcement level.

Third, this is the first study that evaluates the relationship between gender diversity and financial statement fraud whilst conditioning on the impact of state control in the setting of Chinese listed firms. Most Chinese listed companies are characterized by concentrated ownership structures and controlling shareholders are often state or quasi-state institutions (Yu and Ashton, 2015). In addition, by taking advantage of China's recent anti-corruption campaign initiated by President Jinping Xi, this study extends the research of Zhang (2018) by comparing the effect of female corporate leaders on the likelihood of fraud commission and detection between the pre and post-campaign periods. The results confirm that the anti-corruption campaign improves public governance by enhancing corporate governance and raising the cost of fraud.

The structure of the paper is as follows: Section 2 outlines the institutional background and Section 3 reviews the literature and develops hypotheses. Section 4 introduces the variables employed and the research model. Section 5 reports the research findings and Section 6 concludes the paper.

Section snippets

Gender diversity in China

Women play an increasingly important role in modern society, the labor market and the economy. Compared to men, working women usually shoulder the double burden of running the household and managing the workplace. Due to cultural norms, this double burden is particularly onerous for Chinese women (Low et al., 2015). Consequently, promotion systems are biased towards men and there is a lack of women in top management teams and boardrooms. According to Deloitte (2017), the percentage of women in

Review of prior literature

The upper echelons theory offers insights on female leadership. It states that organizational outcomes are partially determined by the characteristics of top managers (Hambrick and Mason, 1984). Diversity can improve governance decisions by the board of directors and enable a beneficial shift in group dynamics. The first argument states that by including directors with diverse skills, which may differ across genders, boards are equipped with a broader skillset to tackle various governance

Prior studies in addressing fraud partial observability

Empirical studies of fraud normally adopt a single logit or probit model. This approach overlooks the latent process of those listed companies that commit fraud and without being caught. Traditional methods are confined to only examine those detected fraud cases, but not those fraud cases not yet been caught (Shi et al., 2016). To reduce the biases resulting from incomplete detection, several approaches have been adopted in prior studies. For instance, Dyck et al. (2010) restrict their samples

Descriptive statistics

Panel A of Table 2 presents the mean descriptive statistics. Panel B presents the standard deviation, minimum, maximum, and median value of the variables. On average, the proportion of female corporate leaders is 16.3%, slightly higher than 14.0% as reported by Cumming et al. (2015), indicating that female participation as business leaders is gradually increasing over time. As shown by Panel B, the median of the female ratio is 14.3%. 51.4% of observations are SOE-controlled firms, implying the

Conclusions

The topic of gender diversity has gained much popularity over the past decade. Women are more risk averse and ethically sensitive than men. This study examines the relationship between gender diversity and financial statement fraud in Chinese listed companies between 2007 and 2018, by using a bivariate probit model. The results show that female corporate leaders are associated with a higher ability of fraud detection, reducing firms' propensity to engage in fraud. Hence, gender diversity

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

References (80)

• et al.

  Audit committee financial expertise, gender, and earnings management: Does gender of the financial expert matter?

  Int. Rev. Financ. Anal.

  (2018)

• M. Yu et al.

  Board leadership structure for Chinese public listed companies

  China Econ. Rev.

  (2015)

• W. Wu et al.

  Political connections, tax benefits and firm performance: Evidence from China

  J. Account. Public Policy

  (2012)

• Y. Wang et al.

  Do state subsidies increase corporate environmental spending?

  Int. Rev. Financ. Anal.

  (2020)

• Y. Wang et al.

  Money shouts! How effective are punishments for accounting fraud?

  Brit. Account. Rev.

  (2019)

• Y. Wang et al.

  Does mutual fund investment influence accounting fraud?

  Emerg. Mark. Rev.

  (2019)

• Z. Wang et al.

  Managerial ability, political connections, and fraudulent financial reporting in China

  J. Account. Public Policy

  (2017)

• G. Wan et al.

  The inequality–growth nexus in the short and long run: Empirical evidence from China

  J. Compar. Econ.

  (2006)

• C.S. Throckmorton et al.

  Financial fraud detection using vocal, linguistic and financial cues

  Decis. Support Syst.

  (2015)

• A. Saeed et al.

  Firm-level determinants of gender diversity in the boardrooms: Evidence from some emerging markets

  Int. Bus. Rev.

  (2016)

D.J. Poirier

Partial observability in bivariate probit models

J. Economet.

(1980)

J.H. Luo et al.

Female directors and real activities manipulation: Evidence from China

China J. Account. Res.

(2017)

D.C. Low et al.

Board gender diversity and firm performance: Empirical evidence from Hong Kong, South Korea, Malaysia and Singapore

Pacific-Basin Finance J.

(2015)

C. Liu

Are women greener? Corporate gender diversity and environmental violations

J. Corp. Finance

(2018)

Y. Liu et al.

Do women directors improve firm performance in China?

J. Corp. Finance

(2014)

Y.F. Kuang et al.

Corporate fraud and external social connectedness of independent directors

J. Corp. Finance

(2017)

A.F. Jurkus et al.

Women in top management and agency costs

J. Bus. Res.

(2011)

Jan Hanousek et al.

Firm efficiency, foreign ownership and CEO gender in corrupt environments

J. Corp. Finance.

(2019)

M. Firth et al.

Ownership, two-tier board structure, and the informativeness of earnings–Evidence from China

J. Account. Public Policy

(2007)

M.J. Conyon et al.

Firm performance and boardroom gender diversity: A quantile regression approach

J. Bus. Res.

(2017)

J. Chen et al.

The impact of board gender composition on dividend payouts

J. Corp. Finance

(2017)

G. Chen et al.

Ownership structure, corporate governance, and fraud: Evidence from China

J. Corp. Finance

(2006)

G. Chen et al.

Is China's securities regulatory agency a toothless tiger? Evidence from enforcement actions

J. Account. Public Policy

(2005)

A. Aluja

Sensitivity to punishment, sensitivity to reward and sexuality in females

Personality Individ. Differ.

(2004)

P. Alam et al.

Conservatism, SEC investigation, and fraud

J. Account. Public Policy

(2012)

B.K. Adhikari et al.

Do women managers keep firms out of trouble? Evidence from corporate litigation and policies

J. Account. Econ., Forthcoming.

(2019)

R.B. Adams et al.

Women in the boardroom and their impact on governance and performance

J. Financ. Econ.

(2009)

Asian Development Bank 2017. Gender Equality and the Labor Market: Women, Work, and Migration in the People's Republic...

D.S. Beu et al.

Ethical decision–making: a multidimensional construct

Bus. Ethics: Eur. Rev.

(2003)

P. Bromiley et al.

A comparison of alternative measures of organizational aspirations

Strateg. Manag. J.

(2014)

J.P. Byrnes et al.

Gender differences in risk taking: a meta-analysis

Psychol. Bull.

(1999)

K. Campbell et al.

Gender diversity in the boardroom and firm financial performance

J. Bus. Ethics

(2008)

J. Chen et al.

CEO accountability for corporate fraud: evidence from the split share structure reform in China

J. Bus. Ethics

(2016)

China Securities Regulatory Commission. 2014. Supervision transformation as the focus address--by CSRC chairman Xiao...

S. Cho et al.

Exploring the effects of China's two-tier board system and ownership structure on firm performance and earnings informativeness

Asia-Pacific J. Account. Econ.

(2007)

J.R. Cohen et al.

The effect of gender and academic discipline diversity on the ethical evaluations, ethical intentions and ethical orientation of potential public accounting recruits

Account. Horizons

(1998)

Y.L. Compton et al.

Gender stereotyping by location, female director appointments and financial performance

J. Bus. Ethics

(2019)

M.J. Conyon et al.

Executive compensation and corporate fraud in China

J. Bus. Ethics

(2016)

R. Croson et al.

Gender differences in preferences

J. Econ. Lit.

(2009)

D. Cumming et al.

Gender diversity and securities fraud

Acad. Manag. J.

(2015)

Cited by (5)

Recommended articles (6)

View full text

© 2021 Elsevier Inc. All rights reserved.

rodriquezshich2001.blogspot.com

Source: https://www.sciencedirect.com/science/article/pii/S0278425421000867

Share this post