Analysis of Corporation’s Financial Fraud and Independent Directors’ Decision Based on Evolutionary Game Theory

Ching Hung Cheng; Zhe Huang; Siqi Lin; Hangyu Wu

doi:10.54691/bcpbm.v31i.2561

Authors

Ching Hung Cheng
Zhe Huang
Siqi Lin
Hangyu Wu

DOI:

https://doi.org/10.54691/bcpbm.v31i.2561

Keywords:

corporate governance, independent director system, evolutionary game theory.

Abstract

The case of Kangmei Pharmaceutical Company’s financial fraud reveals several important issues in the independent director system in China. It is valuable to study these issues separately from the corporation and the independent director’s perspective, as both wish to maximize their profitability. This paper applies evolutionary game theory to construct two games between the corporation and independent directors, and {honest, dishonest} is the strategy set for the corporation in both games, while {dutiful, undutiful} and {continue, resign} are the strategy sets for the independent directors in game 1 and game 2 respectively. The evolutionary stability strategies obtained from these two games and simulation results show that if the independent directors should be dutiful and not quit their positive while the corporation should never consider making any financial fraud, then the independent directors and the corporation will get the optimal benefit. The results suggest that the award mechanism and reputation mechanism for independent directors should be established and fully completed to improve the independent director system.

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References

Kangmei Pharmaceutical Company, http://xinpi.cs.com.cn/new/file/bulletin/2022/4/29/1213223732.PDF, last accessed June 10, 2022

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