The deterrence effect of bank competition on financial fraud: channels of governance and financing

This study examines the impact of bank competition on corporate financial fraud using a sample of Chinese A-share listed firms from 2010 to 2023. Employing the Herfindahl-Hirschman Index (HHI) to measure competition intensity at the prefecture level, we find that greater bank competition (reflected by lower HHI) significantly reduces the likelihood of financial misconduct. Mechanism analysis reveals that lower debt financing costs and improved information transparency serve as two key channels through which bank competition mitigates fraudulent behaviour. Heterogeneity tests further show that this deterrence effect is more pronounced among non-state-owned enterprises and smaller firms. Our results remain robust to various alternative measures of bank competition and fraud, as well as instrumental variable estimation addressing endogeneity concerns. This research contributes to the literature by highlighting banking market structure as an effective external governance mechanism and provides policy insights for leveraging competitive banking environments to enhance corporate integrity in emerging markets.