This study examines the relationship between industry litigation risk and corporate misconduct using China's A-share listed companies’ data from 2007 to 2022. The findings indicate a significant and negative association, where companies in industries with higher median litigation amounts relative to their assets exhibit reduced incidents of misconduct. This suggests that businesses in high-risk litigation sectors may adopt more cautious practices to mitigate legal challenges and protect their reputations. The robustness of these findings is confirmed through a variety of tests, including a quasi-experimental setting of the chief judges rotation implemented in 2008. Furthermore, the study finds that external monitors including financial analysts’ site visits and local law firms moderate the negative relationship between litigation risk and misconduct. We further show that legal enforcement and moral capital are the two channels through which industry litigation risk impacts corporate misconduct. Our findings underscore the role of litigation risk in shaping peer firms' behavior.

Using one of the largest samples of litigation data available to date, we examine whether the political culture of a firm determines its propensity for corporate misconduct. We measure political culture using the politi- cal contributions of top managers, firm political action committees, and local residents. We show that firms with a Republican culture are more likely to be the subject of civil rights, labor, and environmental litigation than are Democratic firms, consistent with the Democratic ideology that emphasizes equal rights, labor rights, and envi- ronmental protection. However, firms with a Democratic culture are more likely to be the subject of litigation related to securities fraud and intellectual property rights violations than are Republican firms, whose party ideology stresses self-reliance, property rights, market discipline, and limited government regulation. Upon lit- igation filing, both types of firms experience similar announcement reaction, which suggests that the observed relationship between political culture and corporate misconduct is unlikely to reflect differences in expected litigation costs.

Corporate misconduct poses significant risks to financial markets, undermining investor confidence and economic stability. This study investigates the influence of World Heritage culture, with its social, historical, and symbolic values, on reducing corporate misconduct. Using firm-level data from China, with its rich cultural heritage and ancient civilization, we find a significant negative association between the number of World Heritage sites near a company and corporate misconduct. This suggests that a richer World Heritage culture fosters an informal institutional environment that mitigates corporate misconduct. This effect is robust across 100 km, 200 km, and 300 km thresholds and remains significant when using a binary misconduct indicator. The results also show that World Heritage culture enhances corporate social responsibility (CSR) and social capital, which in turn reduces corporate misconduct. Additionally, the impact of World Heritage culture is more pronounced in firms located in high social trust areas, those with high institutional investor supervision, and those farther from regulatory authorities. These findings advance academic knowledge and offer practical implications for policymakers and investors.

This paper examines the effect of financial shared service centers (FSSCs) on corporate misconduct. Using a sample of Chinese public companies with hand-collected FSSC data, we find that the adoption of FSSCs is negatively associated with the likelihood and frequency of corporate misconduct. The results hold to a battery of robustness tests. Moreover, we show that the negative association between FSSCs and corporate misconduct is more pronounced in firms that have no management equity ownership, disclose internal control weaknesses, and have more subsidiaries. Additional analyses indicate that FSSCs can help mitigate both disclosure-related and nondisclosure-related misconduct.

Overseas compliance management is crucial for multinationals to operate with high character, but existing research has paid little attention to emerging multinationals’ overseas misconduct. Focusing on different directions and the interaction of the institutional gap and aspiration gap, we conducted an empirical analysis of a sample of Chinese multinationals who engaged in outward direct investment from 2009 to 2021 and found that in the case of a negative institutional gap, there is a positive linear correlation between a positive/negative aspiration gap and overseas misconduct. In the case of apositive institutional gap, there is a U-shaped relationship between a positive aspiration gap and overseas misconduct, and an inverted U-shaped relationship between a negative aspiration gap and overseas misconduct. Research conclusions bridge the divergence of the institutional paradox and aspiration paradox, provide a nuanced understanding on overseas misconduct, and distinguish different situations to guide emerging multinationals to operate in compliance overseas.

We examine an important yet understudied form of reputational sanction in China, namely public criticisms imposed on culpable firms by the Chinese stock exchanges from 2013 to 2018. We find significantly negative cumulative abnormal returns around the announcement date, and they were affected by several factors, including financing propensity, governance mechanism, and equity nature. However, the market reaction is significantly negative only for firms relying on external financing and non-state enterprises, and importantly, becomes insignificant in cases where the firm had self-exposed misconduct before the official announcement of public criticism. Further, we examine other effects of public criticism, finding that public criticism does not improve firms’ long-term values, nor produce strong deterrence to change their behaviour. Overall, the evidence of the effects of public criticism on culpable firms is mixed, suggesting that reputational sanction is a weak, if not ineffective, instrument of market regulation in China.

We examine how mutual funds’ trading and performance respond to corporate misconduct. We exploit a combined dataset of corporate misconduct and holding information of mutual funds and show that mutual funds tend to sell and buy more stocks of corporations with misconduct. Mutual funds with more misconduct exposure perform significantly worse than those with less misconduct exposure. Specifically, the top quintile portfolio of funds with the highest levels of misconduct exposure underperforms the bottom quintile by 1.57% to 1.97% on an annualized basis. Findings show that mutual funds undergo significant losses by investing in misconduct firms, which is more likely to be motivated by overconfidence than limited recognition.