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.

More Research From These Scholars

BFI Working Paper Aug 3, 2018

Price Rigidity and the Origins of Aggregate Fluctuations

Ernesto Pasten, Raphael Schoenle, Michael Weber
Topics:  Fiscal Studies, Monetary Policy
BFI Working Paper Jul 31, 2019

The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

Ernesto Pasten, Raphael Schoenle, Michael Weber
Topics:  Monetary Policy, Fiscal Studies
BFI Working Paper Mar 27, 2018

Historical Antisemitism, Ethnic Specialization, and Financial Development

Francesco D'Acunto, Michael Weber, Marcel Prokopczuk
Topics:  Financial Markets