Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/198872
Authors: 
D'Acunto, Francesco
Weber, Michael
Xie, Jin
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper 7512
Abstract: 
Direct experience of a peer’s punishment might make non-punished peers reassess the probability and consequences of facing punishment and hence induce a change in their behavior. We test this mechanism in a setting, China, in which we observe the reactions to the same peer’s punishment by listed firms with different incentives to react - state-owned enterprises (SOEs) and non-SOEs. After observing peers punished for wrongdoing in loan guarantees to related parties, SOEs - which are less disciplined by traditional governance mechanisms than non-SOEs - cut their loan guarantees. SOEs whose CEOs have stronger career concerns react more than other SOEs to the same punishment events, a result that systematic differences between SOEs and non-SOEs cannot drive. SOEs react more to events with higher press coverage even if information about all events is publicly available. After peers' punishments, SOEs also increase their board independence, reduce inefficient investment, increase total factor productivity, and experience positive cumulative abnormal returns. The bank debt and investment of related parties that benefited from tunneling drop after listed peers’ punishments. Strategic punishments could be a cost-effective governance mechanism when other forms of governance are ineffective.
Subjects: 
corporate governance
cultural finance
reputational sanctions
related party transactions
minority shareholders
emerging markets
corporate fraud
government ownership
JEL: 
D91
D72
G32
G41
K42
Document Type: 
Working Paper

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