Corporate governance is a challenge in emerging markets where the rule of law tend to be weak. The usual mechanisms for reducing corporate fraud aren’t as effective there as they are in developed economies. Take the real estate industry in China. Recent years have seen a crop of fraud cases – such as excessive leveraging followed by bankruptcy – that hurt many investors.
The problem isn’t just weak rule of law. It is not rare for independent directors to be personal friends of top executives. When everyone is cosy, it can open the door wider to potential wrongdoing. This prompted us to look at an informal corporate governance mechanism that could compensate for the ineffectiveness of the usual ways to monitor and reduce securities fraud.
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