Effect of Place of Incorporation, Chinese Culture, and Business Practices on Corporate Fraud: Evidence from Hong Kong Listed Companies

• DOI: http://doi.org/10.1111/ajfs.12168
• Date: 01 April 2017
• Published date: 01 April 2017

Effect of Place of Incorporation, Chinese

Culture, and Business Practices on

Corporate Fraud: Evidence from Hong Kong

Listed Companies*

Josephine Chui-ling Pang†

School of International Education, Beijing Institute of Technology, China

Simon Ming-sum Lo**

Department of Finance and Insurance, Lingnan University, Hong Kong

Received 15 August 2016; Accepted 20 December 2016

Abstract

Mainland Chinese companies make up more than 50% of the Hong Kong securities market

in terms of number of listings and market capitalization. Our empirical results indicate that

Chinese companies have a higher incidence of corporate fraud and greater fraud severity than

other listed counterparts, even after controlling for state versus private ownership, internal

corporate governance, financial standing, firm characteristics, and time factors. Further inves-

tigation reveals that incorporation in China and Chinese culture and business practices are

two distinct and major driving factors in corporate fraud. Conventional explanatory variables

for corporate fraud other than board tenure, firm size, listing year, and year of fraud detec-

tion do not have explanatory power in the Hong Kong context.

Keywords Chinese cross-border listings; Corporate fraud; Hong Kong; Legal system; Corpo-

rate culture and practices; Ownership structure

JEL Classification: G31, G34, G39

*The authors would like to thank Abul Shamsuddin at the University of Newcastle and Sonia

M. L. Wong at Lingnan University for their valuable comments. Any remaining errors are

our own.

**Corresponding author: Simon M. S. Lo, Department of Finance and Insurance, Lingnan

University, SEK 212/12, 2/F Simon and Eleanor Kwok Building, Lingnan University, Tuen

Mun, Hong Kong. Tel: +852-2616-8152, Fax: +852-2462-1073, email: simonlo@ln.edu.hk.

†

Present address: School of International Education, Beijing Institute of Technology, Room

332, Continuing Education Building, 5 Zhongguancun South Street, Haidian District, Beijing

100081, China.

Asia-Pacific Journal of Financial Studies (2017) 46, 221–245 doi:10.1111/ajfs.12168

©2017 Korean Securities Association 221

1. Introduction

Mainland China is one of the largest sources of cross-border listing. According to

the Citi depositary receipts market analysis (see Table 1), trading values were up by

Table 1 Citi depositary receipts market analysis and other cross-listing information

* and ** refer to as at December 31, 2015 and as at June 30, 2016 respectively.

Depositary receipts 2012 2013 2014 2015

Trading volume (in billion shares) 141.6 143.3 157.5 163.7

Trading values (US$ in trillion) (Table 1a) 3.1 2.5 2.5 3.7

Capital raising (US$ in billion) (Table 1b) 12.4 10.5 37.3 11

(Source: Citibank Universal Issuance Guide, 2013, 2016).

(a) Top 10 depositary receipts by trading value

2012 2013 2014 2015

Brazil 12% Brazil 8% China 14% China 22%

Russia 8% UK 8% Brazil 7% UK 5%

UK 7% China 5% UK 6% Brazil 5%

China 6% Russia 4% Israel 2% Israel 3%

Finland 2% Ireland 2% Taiwan 2%

Taiwan 2%

32% 28% 31% 37%

(b) Top five depositary receipts capital raising by country

2012 2013 2014 2015

Russia 53% Russia 25% China 81% Israel 35%

Mexico 26% Taiwan 20% Brazil 3% China 21%

Taiwan 8% China 14% Russia 3% India 17%

Colombia 3% Korea 6% Colombia 3% UK 5%

India 3% Colombia 5% Taiwan 2% France 5%

93% 70% 92% 83%

Number of listings

Market capitalization (US$ in

million)

Chinese companies Total Chinese companies Total

The Hong Kong

Exchanges and

Clearing Ltd (HKEx)*

951 (51%) 1866 1 976 564 (62%) 3 184 695

The New York Stock

Exchange (NYSE)**

86 (75%) 115 580 545 (22%) 2 646 994

The NASDAQ Stock Exchange** 91 (3%) 3166 116 740 (1%) 8 385 704

Singapore Exchange (SGX)* 121 (16%) 769 81 133 (3%) 2 705 336

(Source: respective stock exchange websites, 2016).

J. C.-l. Pang and S. M.-s. Lo

222 ©2017 Korean Securities Association