The Value of Political Ties versus Market Credibility: Evidence from Corporate Scandals in China

Abstract

March 2015 HKUST IEMS working papers are distributed for discussion and comment purposes. The views expressed in these papers are those of the authors and do not necessarily represent the views of HKUST IEMS.

The impact of corporate fraud on director‐interlocked firms: Evidence from bank loans

“…In the case of China, Firth et al (2011) find that firms that falsified financial statements also have higher CEO turnover. Hung et al (2015) show that after scandals related to political network and market credibility, there is a higher likelihood of departure of politically-connected directors.…”

“…For non‐US studies, Firth, Rui, and Wu () find that in China, firms falsifying financial statements lead to negative abnormal stock returns, higher cost of capital, wider bid‐ask spreads, and more modified audit opinions. Hung, Wong, and Zhang () examine the consequences of corporate scandals in China and compare the value of political ties and market credibility; they find that the market reacts more negatively to scandals related to both the firms' political networks and market credibility than scandals related only to the firms' market credibility. Zeume () finds that, after the passage of the UK Bribery Act 2010 (as a shock to UK firms' cost of doing business), British firms that operate in high‐corruption countries experience a drop in firm value.…”

“…Hung et al. () show that after scandals related to political network and market credibility, there is a higher likelihood of departure of politically‐connected directors.…”

Corporate Governance Research on Listed Firms in China: Institutions, Governance and Accountability

“…These political ties for Chinese listed firms are found to have great values in a recent paper in which Hung et al [2015] examine corporate scandals. Instead of directly testing the value of these existing ties between the politically connected firms, they examine if the disruption of these political ties are associated with any significant decline in the firms' stock prices.…”

Securities Law Violation and Reputation Loss in the Chinese Capital Market

“…Therefore, stock price fluctuations on the announcement day may not fully capture the total wealth effect (Chen et al, 2005;Firth et al, 2011a;Hung et al, 2015). For this reason, I…”