Analysis of the Causes and Consequences of Corporate Financial Fraud—Take HANGZHOU CENTURY CO., LTD as An Example.

Abstract

In recent years, financial fraud by listed companies has become increasingly frequent, significantly disrupting the normal functioning of the capital market. It not only damaged investors’ trust but also hindered the effective allocation of resources. This paper takes the financial fraud incident of HANGZHOU CENTURY CO., LTD as the research object. Based on the fraud triangle theory, it analyzes the internal and external motivations of enterprises to commit fraud from the three dimensions of motivation, opportunity, and rationalization. It uses the event study methodology to examine the market reaction to the company’s stock price after the disclosure of the penalty announcement. Research shows that after the announcement is disclosed, the company’s cumulative abnormal return during the event window period is significantly negative. It indicates that the capital market has a strong negative attitude towards financial fraus, and investor confidence has been severely damaged. The case of HANGZHOU CENTURY CO., LTD reflects the serious harm that financial fraud poses to enterprises, investors, and the market. This paper suggests that companies should strengthen their governance, investors should enhance their risk identification capabilities, and regulators should effectively fulfill their duties to maintain market credibility.