Corporate Scandals in China: The Cases of Kangmei, Xintai and Zhangzidao
Working Paper Author/Authors
Key Finding
China’s stock market has become increasingly efficient at pricing information, but concentrated ownership and weak shareholder protections continue to limit its ability to deter controlling-shareholder fraud
Abstract
Since the establishment of the Shanghai and Shenzhen Stock Exchanges in 1990, China's capital market has grown into the second-largest globally by market capitalization. Despite early characterizations as a speculative "casino," empirical research now demonstrates that Chinese stock prices possess informational efficiency comparable to that of the US market. However, a core institutional paradox persists: while the market has developed effective pricing capabilities, it consistently lacks sufficient disciplinary capacity to deter corporate fraud orchestrated by controlling shareholders. This governance gap is exacerbated by weak minority shareholder protections and historical legislative ambiguities, including the belated codification of "shadow director" liability in the 2023 Company Law revision. This chapter examines this paradox through three landmark corporate scandal cases - Kangmei Pharmaceutical, Xintai Electric, and Zhangzidao, each representing a distinct evolutionary pathway in China's regulatory response. These cases illustrate major legal reforms on independent directors, advance compensation, “opt-out” securities class action, delisting reform, and technology-driven enforcement. The chapter concludes that the concentrated shareholding structure remains the primary driver of corporate misconduct, and that China’s unique retail-investor-dominated market necessitates regulatory approaches distinct from Western models, with further reforms needed to address persistent agency problem.
