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Punish One, Teach A Hundred: The Sobering Effect of Punishment on the Unpunished

Author

Listed:
  • Francesco D'Acunto
  • Michael Weber

    ()

  • Jin Xie

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.

Suggested Citation

  • Francesco D'Acunto & Michael Weber & Jin Xie, 2019. "Punish One, Teach A Hundred: The Sobering Effect of Punishment on the Unpunished," CESifo Working Paper Series 7512, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_7512
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    More about this item

    Keywords

    corporate governance; cultural finance; reputational sanctions; related party transactions; minority shareholders; emerging markets; corporate fraud; government ownership;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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