Given expectations of good corporate behavior by the average investor in China may be lower than in more developed markets, does corporate fraud in China have much of an effect on investor sentiment?
That was just one of the the questions Geng Niu (et. al.) from the Southwestern University of Finance and Economics set out to answer in the work highlighted today.
In answering this question they also came across another consequence of corporate fraud that may be unique to China and one that could be useful for policy makers seeking to take on China’s never ending home price rises.
Back to the top question. Yes, fraud matters in China in terms of how it raises the cost of equity AND debt for the non-crooks that are tarred with the same brush as rogues. For that reason alone you’d think it would be worth bearing down more consistently on?
In China though corporate fraud seems to have also had the collateral effect of driving investors into the property market. Given the limited choice investors have for savings in China this makes sense but this is the first work to conclusively establish a link and quantify it.
So, China policy wonks take note. If you want to take long-term steam out of the property market cleaning up the casino stock market would be one very important component of a long-term solution.
You can access the paper via the following link Corporate Fraud – Unintended Externalities
Happy Sunday.