Abstract
By studying a recent executive corruption case in China (the Bai Peizhong case), which was initially exposed by a theft, later blocked by the local security department, and finally spread through the Internet, this paper first examines the contagion effect of executive corruption and its determinants and transmission mechanism. We find that (1) in response to the news, the stock prices of the two listed companies involved declined over the event window and the negative effect spilt over to their peer companies in the same industries; (2) the above contagion effect was more pronounced in the state-owned peers but was attenuated by the employment of an outside Big Four auditor; (3) the stock prices of the two involved companies declined and their peers’ behaviour was inhibited by the dismissal of Bai Peizhong; (4) the above market reaction was a result of investors’ expectation of the existence of large non-pecuniary compensation in the involved companies and industries; and (5) the contagion effect was not influenced by earnings management or the financial restatement of the peer firms.
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1 This paper is jointly supported by the National Natural Science Foundation of China (project numbers: 71172206 and 71102159) and the Overseas, Hong Kong and Macao Scholars Collaborative Research Fund (project number: 71328201). All of the data and information about the case are collated from public media. We thank the executive editor Nancy Su and the anonymous reviewers for their constructive suggestions, as well as all the discussants and participants at the 10th International Symposium on Empirical Accounting Research held in China and the 2012 China Accounting and Finance Review International Symposium. We are grateful for the valuable comments and suggestions from Hong Xie (University of Kentucky), Xihe Gong (The Hong Kong Polytechnic University), Chun Cai (Southwestern University of Finance and Economics), and Juan Zhang (Guanghua School of Management, Peking University). Any errors are ours.
CLC Codes: F275.5, F239
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Chen, D., Liu, Q., Luo, L. et al. Executive Corruption, Contagion Effect, and Investor Protection — Empirical Evidence from the Bai Peizhong Case. China Account Financ Rev 16, 19 (2014). https://doi.org/10.7603/s40570-014-0019-x
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DOI: https://doi.org/10.7603/s40570-014-0019-x