Abstract
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.
Highlights
The cumulative abnormal returns (CAR) of the industry peer firms is significantly negative (-6.7 per cent over (-1, 1); -4.7 per cent over (0, 1)) over all Event 1 windows, as it is over all the windows of Event 2
These preliminary results suggest that the Bai Peizhong corruption case affected the stock prices of the two listed subsidiaries of the Shanxi Coking Coal Group negatively and those of their industry peers
These results show that CARs are negatively associated with the level of non-pecuniary compensation (CONSU), suggesting that non-pecuniary compensation exacerbates the contagion effect as it is perceived by investors as an indicator of the potential corruption tendency of executives in their invested companies
Summary
In recent years in China, a series of incidents has attracted the public’s attention to corruption, including the cases of Zhou Jiugeng, the former head of the Real Estate Management Bureau, Jiangning District, Nanjing, who was sentenced to 11 years’ imprisonment for corruption; Yang Dacai, the former head of the Shaanxi Work Safety Management Bureau, who was sentenced to 14 years’ imprisonment for accepting bribes and for property crimes of unknown origin; Cai Bin, the former Political Commissar of the Urban Management and Administrative Execution Bureau, Panyu Branch, Guangzhou, who was sentenced to 11 years and 6 months’ imprisonment for accepting bribes; and Lei Zhengfu, the former Secretary of Commission, Beipei District, Chongqing, who was sacked for his involvement in an “obscene video” and later sentenced to 13 years’ imprisonment for accepting bribes. The above definition applies to politicians and civil servants and to the chief executive
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