How boards' factional faultlines affect corporate financial fraud

In the corporate governance literature, it has been long debated on whether boards can effectively monitor executives' behavior. Drawing on the factional faultlines research, this study proposes that the greater the magnitude of the faultline between inside and outside directors, the lower the likelihood of corporate financial fraud; this effect is weaker when outside directors sit on more other boards. An analysis of a sample of Chinese publicly-listed firms for 2003-2015 renders support to our predictions. Our results are robust for various model specifications and alternative measures of key variables. The implications of our findings to the corporate governance and faultline literatures are discussed.