City Digitalization and Corporate Financial Fraud: An Information Asymmetry Perspective

Abstract One pivotal driver of corporate financial fraud is the information asymmetry between cooperative executives and external stakeholders. We propose that city‐level digitalization can mitigate such information asymmetry and deter financial fraud of local firms. Using panel data from listed firms and archival data in China, we find that city digitalization is negatively associated with the incidence of corporate financial fraud. However, this association is weaker in regions with high bureaucratic corruption but is stronger for firms with low corporate social responsibility scores. Further mediating analyses show that city digitalization reduces information asymmetry between local firms and the market and in turn decreases financial fraud incidence. Overall, our research sheds novel light on the governance role of city digitalization and highlights the significance of complementarity between various governance components.