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Suppression or rebound? How does legal construction influence corporate violations?

Author

Listed:
  • Zhang, Lu
  • Wu, Hao

Abstract

This study investigates the relationship between legal construction and corporate violations using a two-way fixed effects model. The results show that legal construction can suppress corporate violations, with this effect being facilitated through improvements in internal control quality and reductions in corporate financial risks. Additionally, climate risk weakens the effectiveness of legal construction in regulating corporate behavior and curbing violations. It is important to note that the influence of legal development on corporate misconduct varies depending on the intensity of a firm’s R&D investment and its stage in the business life cycle.

Suggested Citation

  • Zhang, Lu & Wu, Hao, 2025. "Suppression or rebound? How does legal construction influence corporate violations?," Finance Research Letters, Elsevier, vol. 86(PA).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pa:s1544612325016472
    DOI: 10.1016/j.frl.2025.108393
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    Keywords

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    JEL classification:

    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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