Bank Monitoring and Corporate Fraud : Evidence from a Natural Experiment

We study how bank monitoring affects corporate fraud in China. Financial We study how bank monitoring affects corporate fraud in China. Financial misreporting is less prevalent in provinces with more developed banking sectors. A natural experiment using the staggered liberalization of the banking sector after China's accession to WTO supports the causal effect of bank monitoring on misreporting fraud. The reduction in fraud after liberalization is greater among clients of foreign banks, but fraud also drops among domestic borrowers, consistent with a spillover effect. The decrease is concentrated among firms whose ratio of long-term to total loans increases. In addition, we find that bank monitoring reduces the frequency of tunneling