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<p>This study examines whether mediation, as an alternative dispute resolution, can effectively deter financial fraud. Using the introduction of a mediation scheme that encourages courts in certain regions to settle securities disputes by mediation in China as a natural experiment, we find that firms headquartered in areas covered by the mediation scheme reduce the likelihood of financial fraud by 26% relative to firms headquartered elsewhere. The results hold to a series of robustness checks. Cross-sectional analyses indicate that the deterrent effect of mediation is stronger in private firms, firms with CEO duality, and firms with weaker external governance mechanisms. Additionally, we find that the mediation scheme curtails earnings management through discretionary accruals, managerial use of optimistic language in financial reports, and controlling shareholders’ tunneling. Overall, our findings suggest that mediation acts as an effective monitoring mechanism for financial reporting.</p>

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Is Mediation a Shortcut to Deter Financial Fraud? Evidence from the Mediation Scheme in China

  • 期刊论文

  • 发表日期：

    2025年6月10日

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  • Huixia Chen,
  • Yurou Liu

摘要

This study examines whether mediation, as an alternative dispute resolution, can effectively deter financial fraud. Using the introduction of a mediation scheme that encourages courts in certain regions to settle securities disputes by mediation in China as a natural experiment, we find that firms headquartered in areas covered by the mediation scheme reduce the likelihood of financial fraud by 26% relative to firms headquartered elsewhere. The results hold to a series of robustness checks. Cross-sectional analyses indicate that the deterrent effect of mediation is stronger in private firms, firms with CEO duality, and firms with weaker external governance mechanisms. Additionally, we find that the mediation scheme curtails earnings management through discretionary accruals, managerial use of optimistic language in financial reports, and controlling shareholders’ tunneling. Overall, our findings suggest that mediation acts as an effective monitoring mechanism for financial reporting.