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| Does Improving the Social Credit Environment Reduce Corporate Fraud？ Evidence from the Construction of China's Social Credit System |
| HUANG Zhuo, TAO Yunqing, WANG Shuai
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National School of Development/Institute of Digital Finance, Peking University;
School of Finance, Zhongnan University of Economics and Law |
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Abstract Although China's economic development achievements are world-renowned, it is undeniable that its formal institutional systems remain imperfect, which hinders high-quality economic development. Therefore, in recent years, the Chinese government has launched a series of institutional reforms, of which the construction of the social credit system is an important component. Undoubtedly, the construction of the social credit system is a key focus for the government, as it will have a comprehensive and far-reaching influence on the micro behaviors of enterprises (Cao et al., 2022). However, the literature pays insufficient attention to the microeconomic effects of constructing the social credit system. Therefore, this study examines the microeconomic effects of constructing the social credit system from the perspective of corporate fraud. In theory, the construction of the social credit system will improve the social credit and market environments through modern technologies, such as the Internet and big data, which will reduce corporate fraud. Overall, the construction of the social credit system results in three profound changes for enterprises: first, it reduces agency costs, second, it eases financing constraints, and third, it improves information transparency. Therefore, this study expects that the construction of the social credit system will mainly affect corporate fraud through the following three mechanisms.
Taking China's social credit system as a natural experiment, this study uses data from A-share listed companies in Shanghai and Shenzhen from 2010 to 2020 to examine empirically whether and how the social credit environment can suppress corporate fraud. The results regarding the effects of improving the social credit environment are as follows. First, this improvement significantly inhibits corporate fraud, a result that continues to hold after a series of robustness tests. Second, it considerably reduces the tendency of fraud and the possibility of being audited. At the same time, the improvement of the social credit environment significantly reduces information disclosure fraud, business fraud, and leadership fraud. Third, the inhibitory effects on fraud are more pronounced for enterprises that are non-state-owned, have poor governance, have poor internal control quality, and those in areas with poor business environments than in other enterprises. Fourth, the mechanisms of reducing corporate agency costs, easing corporate financing constraints, and improving corporate information transparency drive our findings. Finally, the improvement of the social credit environment effectively reduces the operational and bankruptcy risks of enterprises. This study provides considerable support for the government's continued focus on further improving the construction of the social credit system.
This study makes three key contributions to the literature. First, it supplements the relevant literature on the impact of social credit on micro-enterprise behavior, which is of great theoretical importance. In particular, this study directly examines the impact of the policy on corporate fraud, thus elucidating the microeconomic effects of constructing the social credit system. Second, this study complements the literature on the factors affecting corporate fraud. The literature discusses the influencing factors of corporate fraud from both internal and external aspects. This study demonstrates that improving the social credit environment inhibits enterprise violations by reducing agency costs, alleviating financing constraints, and improving information transparency. Thus, it not only reveals the internal mechanism through which the social credit system affects corporate fraud but also expands research on the external factors influencing corporate fraud. Third, this study has clear policy implications in support of upholding and improving the construction of the social credit system to curb corporate fraud. It reinforces the benefits of the “credit cities” policy, showing that they create a good social credit environment, and supporting expansion of the credit cities pilot projects to further reduce corporate fraud.
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Received: 28 November 2022
Published: 08 August 2023
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