J Bus Ethics (2016) 134:505–508 DOI 10.1007/s10551-014-2381-7 Sustainable and Ethical Entrepreneurship, Corporate Finance and Governance, and Institutional Reform in China Douglas Cumming • Wenxuan Hou Edward Lee • Published online: 19 September 2014 Ó Springer Science+Business Media Dordrecht 2014 The Journal of Business Ethics Special Issue Conference on the Sustainable and Ethical Entrepreneurship, Corporate Finance and Governance, and Institutional Reform in China was organized by China Development and Research Centre (UK) on April 6–7 2013 at the Diaoyutai State Guesthouse and Tangla Hotel, Beijing, China. The conference brought together academics from around the globe to disseminate their latest research on ethical issues associated with entrepreneurship, finance, governance and reform of China, which is one of the fastest growing emerging economies in the world today. The rise of China has elevated hundreds of millions of people out of poverty, and entrepreneurship had played an important role in this achievement. However, in a transitional economy like China, sustainable growth and competitiveness of entrepreneurship would require development in external financing, corporate governance and institutional reform. A core issue that underlies the development in these aspects is business ethics because accountability, stewardship and social responsibility are important prerequisites of confidence among outside investors. The successes, challenges and experiences of China’s economy so far warrants researches of these issues to obtain insights and inform both further reforms in China as well as the economic development of other emerging countries. D. Cumming (&) Schulich School of Business, York University, Toronto, Canada e-mail: dcumming@schulich.yorku.ca W. Hou University of Edinburgh Business School, Edinburgh, UK E. Lee Manchester Business School, University of Manchester, Manchester, UK The conference attracted over 80 submissions from researchers based all over the world, which reflects the increase of interest among academics on China and the aforementioned topics. There were many high quality research papers among these submissions, and twelve papers were invited for presentation at the conference following careful selection process. Each of these papers then went through blinded reviews with two anonymous referees, and following this rigorous development process 11 papers were eventually accepted for publication in this Special Issue. These papers can be classified into three categories, i.e. corporate governance, institutional effects and corporate fraud. The keynote speeches of this conference were contributed by Prof. Joseph P. H. Fan from the Chinese University of Hong Kong and Prof. Kenneth A. Kim from Renmin University, China. Both speakers offered interesting and thought-provoking discussion on interesting and important issues relating to the conference themes, and one speaker also contributed a research paper, which is based on the keynote topic and is published in this Special Issue following the standard review process. In the rest of this editorial note, we briefly discuss the keynote speeches, summarize the findings and implications of the 11 papers included in the Special Issue, and offer future research direction in the relevant topic area. The keynote address of Joseph Fan is based on the research paper Fan et al. (2014) co-authored with Li Jin and Guojian Zheng and is entitled ‘‘Revisiting the bright and dark sides of capital flow in business groups.’’ The paper focuses on the transfers of financial resources within business groups in China, and seeks to test the hypothesis that intra-group capital flow could be incentivized either by expropriation of minority shareholders, which is against ethical business practices, or by group capital allocation efficiency, which is founded on economic considerations. 123 506 In other words, intra-group cash flow activities can be associated with negative and unethical role when the parent and the listed subsidiaries are more severely misaligned in incentives, and with positive and economic role if the parent faces more financing constraints. Using a sample of over 600 firm-year observations from 1999 to 2005, it finds that intra-group capital flows are more efficient when the groups are less associated with conflicts of interest between controlling and minority shareholders, and when they experience strong external financial constraints. The policy implication that stems from this study is that government attempts to regulate intra-group fund transfers may impede economic efficiency. This is because regulators may not necessarily be able to determine whether the transactions are attributed to unethical expropriation or to efficiency objectives. The keynote address by Kenneth A. Kim is entitled ‘‘Religion and corporate finance.’’ The study is based on a sample of 4,000 family firms in China. In the sample, over 30 % of corporate founders adhere to a religion, with 12 % to Western religion and 19 % to Eastern religion. The empirical analysis reveals that religious entrepreneurs have lower leverage and less investment in intangible assets compared with their non-religious counterparts. Interestingly, these findings mainly hold for entrepreneurs who are associated with Western religions, as opposed to Eastern religions. The findings are robust to controls of firm-specific and founder-specific factors that can influence firms’ risk-taking. As such, this study provides evidence that religion can influence corporate decision making beyond rational economic considerations. It also shows that established intuition that religious people are risk adverse holds but mainly applies only to Western religions. However, the study does not find significant evidence that firms of religious entrepreneurs are associated with safer products. This implies that business ethics of religious entrepreneurs are not necessarily more pronounced relative to their non-religious counterparts. The corporate governance theme is examined by four papers. Cao et al. (2014), titled ‘‘Social capital, informal governance and post-IPO firm performance: A study of Chinese entrepreneurial firms,’’ provide evidence that social capital provides informal governance effect in China where investor protection is considered to be weak. For instance, it shows that greater political connections or high percentage of external investors improve firm performance, and intra-group related party transactions tend to be associated with performance deterioration. The main implication to business ethics literature is that despite of the positive role played by social capital in emerging economies, it can also lead to with rent-seeking behaviour and crony capitalism. He and Rui (2014), titled ‘‘Ownership structure and insider trading: Evidence from China,’’ 123 D. Cumming et al. studies the information content of insider transactions in China, and whether corporate ownership structure influences share price responses to these transactions. It documents that the market reactions are a convex function of the percentage of shares owned by the largest shareholder. It also finds lower market reactions when largest shareholder is government related, or when the control rights of largest shareholder exceed cash flow rights. Furthermore, it also shows greater market reactions among firms with less severe expropriations. The business ethics implication of this study is that more effective governance structure could reduce unethical insider behaviour and improve the informativeness of their transactions. Hass, Johan and Schweizer (2014), titled ‘‘Is corporate governance in China related to performance persistence?,’’ examines the relation between corporate performance persistence and governance mechanisms, which are associated with board characteristics and shareholder structure. It finds that better governed firms are associated with higher degree of performance persistence. The key implication in relation to business ethics is that the introduction of better corporate governance could in turn benefit firms by reducing their cost of capital. Tan and Tang (2014), titled ‘‘Donate money, but whose? An empirical study of ultimate control rights, agency problems, and corporate philanthropy in China,’’ examines the effect of micro-governance mechanisms and corporate philanthropy. It provides interesting evidence that the ultimate controllers in private enterprises of China are more reluctant to donate the assets or resources they own than those owned by minority shareholders to charitable organizations. In terms developing business ethics in China, the important implication of this paper is that the government should strengthen corporate philanthropy incentives by improving the relevant disclosure rules, supervision guidelines, tax allowances and social awareness. The institutional effect theme is examined by three papers. Ang et al. (2014), titled ‘‘Good apples, bad apples: Sorting among Chinese companies traded in the US,’’ provide empirical evidence that Chinese firms cross-listed in the US that more likely to commit fraud if they are listed through reverse mergers and if they originate from low social trust regions in the home country. It also provide evidence that Chinese firms cross-listed in the US that do not commit fraud make proactive efforts to differentiate themselves from their fraudulent counterparts by sending costly signals such as insider purchasing shares and increasing dividend. The contribution of this study to the business ethics literature is that it provides factors that may help US investors identify suspicious foreign cross-listing firms on the US exchanges. The Ding et al. (2014), titled ‘‘Environmental management under sub-national institutional constraints,’’ provide evidence from China that the Sustainable and Ethical Entrepreneurship enforcement stringency of environmental regulations at provincial level and the degree of foreign ownership both negatively influence levies charged for firms’ emissions. It also shows that enforcement stringency moderates the relationship between foreign ownership and emission charges. For the business ethics literature, this study highlights the need to consider sub-national factors in environmental management given the possible heterogeneity of enforcement across different regions in larger emerging economies. Hass, Johan and Muller (2014), titled ‘‘The effectiveness of public enforcement: Evidence from the resolution of tunnelling in China,’’ examines the influence of regulatory intervention to deter tunnelling through inter-corporate loans. It documents that public enforcement actions through blacklisting and sanctions lead to reduced tunnelling activities and improved performance following the regulatory intervention. The policy implication in association with business ethics development is that public enforcement in China is effective in curbing tunnelling behaviour, and therefore should be strengthened by regulatory agencies. The corporate fraud theme is examined by four papers. Conyon and He (2014), titled ‘‘Executive compensation and corporate fraud in China,’’ studies the relationship between corporate fraud and CEO remuneration. It documents a negative relationship between fraud and remuneration, and this effect is greater among firms that committed more severe fraud. It also provides evidence that the remuneration penalties after fraud are greater among firms that are privately controlled, firms with split posts of CEO and chairman, and firms located in more developed regions. The contribution to the business ethics literature provided by this study is empirical evidence of managerial accountability to fraud from an emerging economy where shareholder protection and legal enforcement is considered to be weak. Firth et al. (2014), titled ‘‘Regulatory sanctions on independent directors and their unintended consequences to the director labour market: Evidence from China,’’ investigates penalty on independent directors after their firm commits fraud. It shows independent directors are less penalized than insider directors, are sit on fewer number of boards following the penalty, and are associated with higher quality firms following the penalty. In terms of implication to the business ethics literature, these findings suggest that regulatory sanctions induce disincentive among independent directors to provide their services in high risk firms, where the expertise of good independent directors are actually more required. Wu et al. (2014), titled ‘‘Institutional investors, political connections, and the incidence of regulatory enforcement against corporate fraud,’’ examines whether institutional investors and political connection influence the propensity of corporate fraud in China. It provides 507 evidence that corporate fraud is negatively associated with institutional investor ownership and is positively associated with political connections of enterprises. Interestingly, it also finds evidence that political connection reduces enforcement actions against corporate fraud. The policy implication in terms of business ethics is that further development of institutional investors could contribute to fraud deterrence in emerging economies. Chen et al. (2014), titled ‘‘Does the external monitoring effect of financial analysts deter corporate fraud in China?,’’ examines the influence of analyst coverage on fraud deterrence through the theoretical perspective of the fraud triangle, which specifies three main fraud determinants including opportunity, incentives and rationalization. It provides evidence that analyst coverage reduces fraud propensity, which is consistent with external monitoring effect reducing fraud opportunity instead of performance pressure effect increasing fraud incentives among Chinese listed firms. The policy implication associated with business ethics in China is that analyst profession should be further developed for the benefit of investors. Together, the interesting findings and implication from these aforementioned papers included in the Special Issue suggest many avenues for future research on business ethics in China and other emerging economies. For instance, given that institutional investor and analyst contribute to the reduction in fraud in weak shareholder protection environment, would private equity, hedge funds, and foreign investors also play a similar role? Since institutional factors influence business ethics in such environment, there is also room to look at what kind of regulations or reforms can encourage investment in ethical, sustainable and socially responsible entrepreneurship. Other interesting research questions worth exploring includes whether sustainable and ethical entrepreneurship leads to better long run performance, and what type of corporate financing and governance approach are beneficial to them. Apart from focusing on firms within China, comparative studies of these research questions between mainland Chinese firms and their counterparts elsewhere in Greater China region such as Hong Kong, Macao and Taiwan could also offer new insights to the relevant issues. Comparison can also be drawn between Chinese firms and those in other members of the BRIC, such as Brazil, Russia and China. References Ang, S. J., Jiang, Z., & Wu, C. (2014). Good apples, bad apples: sorting among Chinese companies traded in the U.S. Journal of Business Ethics,. doi:10.1007/s10551-014-2387-1. Cao, J., Ding, Y., & Zhang, H. (2014). Social capital, informal governance and post-IPO firm performance: A study of Chinese 123 508 entrepreneurial firms. Journal of Business Ethics,. doi:10.1007/ s10551-014-2383-5. Chen, J., Cummings, D., Hou, W., & Lee, E. (2014). Does the external monitoring effect of financial analysts deter corporate fraud in China? Journal of Business Ethics,. doi:10.1007/s10551014-2393-3. Conyon, M., & He, L. (2014). Executive compensation and corporate fraud in China. Journal of Business Ethics,. doi:10.1007/s10551014-2390-6. Ding, S., Jia, C., Wu, Z., & Yuan, W. (2014). Environmental management under subnational institutional constraints. Journal of Business Ethics,. doi:10.1007/s10551-014-2388-0. Fan, J., Jin, L., & Zheng, G. (2014). Revisiting the bright and dark sides of capital flows in business groups. Journal of Business Ethics,. doi:10.1007/s10551-014-2382-6. Firth, M., Wong, S., Xin, Q., Yick, H. Y. (2014). Regulatory sanctions on independent directors and their consequences to the director labor market: Evidence from China. Journal of Business Ethics. doi:10.1007/s10551-014-2391-5. 123 D. Cumming et al. Hass, L., Johan, S., & Muller, M. (2014a). The effectiveness of public enforcement: evidence from the resolution of tunneling in China. Journal of Business Ethics,. doi:10.1007/s10551-014-2389-z. Hass, L., Johan, S., & Schweizer, D. (2014b). Is corporate governance in China related to performance persistence? Journal of Business Ethics,. doi:10.1007/s10551-014-2385-3. He, Q., & Rui, O. M. (2014). Ownership structure and insider trading: evidence from China. Journal of Business Ethics,. doi:10.1007/ s10551-014-2384-4. Tan, J., & Tang, Y. (2014). Donate money, but whose? an empirical Study of ultimate control rights, agency problems, and corporate philanthropy in China. Journal of Business Ethics,. doi:10.1007/ s10551-014-2386-2. Wu, W., Johan, S., & Rui, O. M. (2014). Institutional investors, political connections, and the incidence of regulatory enforcement against corporate fraud. Journal of Business Ethics,. doi:10. 1007/s10551-014-2392-4. 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