Can artificial intelligence mitigate corporate fraud? Exploring the influence of institutional cross-holdings and financial misallocation

Abstract

This study examines the impact of artificial intelligence on corporate fraud among Chinese A-share listed firms from 2005 to 2021. It also explores the mediating role of institutional cross-holdings and the moderating role of financial misallocation. Utilizing firm-fixed effect models, the findings indicate that artificial intelligence significantly reduces corporate fraud. Further analyses reveal that institutional cross-holdings partially mediate the relationship between artificial intelligence and corporate fraud, suggesting that artificial intelligence not only directly diminishes fraud but also enhances supervision by attracting institutional cross-holdings. While financial misallocation does not moderate AI's direct effect on corporate fraud or the indirect pathway through institutional cross-holdings' second half, it negatively moderates the first half of the indirect pathway. These results remain robust after conducting various robustness and endogeneity tests. This study provides evidence of AI's corporate governance effects and offers important implications for companies and policymakers aiming to invest in artificial intelligence to mitigate fraud.