Do financial analysts discourage or encourage corporate fraud? Empirical evidence from China

Abstract

Purpose

This paper aims to focus on the role of financial analysts in corporate fraud in the Chinese stock market.

Design/methodology/approach

Data on the analyst coverage and all the types of corporate fraud were obtained for 16,284 company-year observations of Chinese companies. The sample was subsequently divided into those of state-owned enterprises, before and after financial crisis.

Findings

The overall results indicate that analyst coverage effectively deters the occurrence of fraud. The sub-sample results suggest that the impact of analysts on deterring fraud is more pronounced in non-state-owned enterprises, especially after the financial crisis. The path analyses show that analyst coverage can deter corporate frauds by affecting information transparency and investor attention. Furthermore, the results show that the deterrence role of financial analysts varies with fraud types: it is more pronounced in deterring disclosure fraud, but not as effective in illegal guarantees and illegal insider dealing. Moreover, analyst coverage can deter the occurrence of fictitious reporting, intentional postponement and material omission.

Originality/value

This paper not only examined the overall fraud probability but also taking into consideration the heterogeneity of the information availability and research focus of financial analysts and examined the analysts’ impact on the occurrence of difference types of fraud. Moreover, this paper explored why financial analysts can deter corporate frauds through path analyses.

Citation

Liu, H., Yang, B. and Zhang, J. (2021), "Do financial analysts discourage or encourage corporate fraud? Empirical evidence from China", Pacific Accounting Review, Vol. 33 No. 1, pp. 81-113. https://doi.org/10.1108/PAR-03-2020-0036