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Discussion by TJ Wong

Law, Economics, Corporate Governance, and Corporate Scandal in a Transition Economy: Insight from China. Discussion by TJ Wong. Objective of paper. Link firm characteristics and institutional variables with corporate scandals

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Discussion by TJ Wong

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  1. Law, Economics, Corporate Governance, and Corporate Scandal in a Transition Economy: Insight from China Discussion by TJ Wong

  2. Objective of paper • Link firm characteristics and institutional variables with corporate scandals • Firm characteristics - ownership type, % ownership, governance variables • Regional institutional variables - market development and legal systems • Corporate scandals - CSRC, SHSE and SZSE’s enforcement of security regulations

  3. Interesting features • Firms that were identified by CSRC, SHSE and SZSE as fraudulent • Not just linking ownership or governance with accounting, they also look at institutions where the firm is located

  4. Key findings • Ownership type matters • Ownership % matters • Some governance variables matters • Fewer scandals in rich regions • Legal system matters

  5. Puzzles Regulators’ incentives • Need to understand regulators’ incentives. Government has such close ties with firms. • Donald Tong (CSRC): “government being the regulator and owner”. • Who commits the fraud? What are the motives for committing the fraud? What types of fraud? Who actually benefit from it? • What are the agency conflicts? Govt vs. shareholders = intervention; shareholders vs. managers = stealing.

  6. Hypotheses • H1: Measuring ultimate or immediate owner? Comparing firms with one-layer vs. multiple layers, or government vs. private firms? • Government firms are less associated with scandals because CSRC is less strict on them? • H2: If ultimate owner is government, why would increase in ownership concentration in the low range increase incentive to monitor managers? • H3: What does “independence” mean? What agency conflicts? Govt vs. shareholders or shareholders vs. managers? • Directors, chairman and supervisors’ share ownership. Need to explain why matters if property rights so poorly defined.

  7. Top-down approach • Aim to understand regulators’ and firms’ incentives • Under what conditions would ownership (ultimate) matter? Under what conditions would corporate structure (layers) matter? Would board structure or other CG mechanisms (auditor type) matter at all?

  8. Incentives and conflicts Central or Local Govt Regulator Govt or Private Owner Firm Market Legal systems

  9. Use partitioning variables • Industry – central government may want to help certain industries, thus, more lenient. • Govt vs. private. Same thing. Regulators may have different incentives. • Places where government intervention more severe, would government ownership vs. private ownership be different. More intervention related scandal? • In places where legal system, more stealing or asset stripping?

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