Abstract: From the point of view of behavioral economics, this study theoretically explains and empirically tests the relationship between the intrinsic control mechanism of corporate performance and management hidden corruption within Chinese SOEs by using a data of Chinese State-owned listed companies in China ‘A stock market’ between year 2010 to 2014. Results suggest that managements’ individual fraud risks are raised under the dual impact of reference point effect and over-optimism. As results of the management hidden corruption increased when company performance continues improving. Further, this study finds that internal governance mechanism and external regulations affect the relationship between corporate performance and management hidden corruption in Chinese SOEs. Results of this study suggest that high quality internal control systems and external regulations such as the “Eight-Point Regulation” effectively restrain management corruption.

Key words:  hidden corruption, corporate performance, reference point, over-optimism, internal control, eight-point frugality code