Punish one, teach a hundred: The impact of punishments on ex-post misconduct of unpunished firms

we examine whether regulatory punishments imposed on a firm affect the behavior of other firms that have not been punished previously but share cross-ownership with the former. We find that when a firm's cross-firm is punished, the probability of that firm engaging in misconduct decreases significantly in the subsequent year, suggesting that the punishment event generates a spillover effect. Our findings are robust to a series of robustness tests, especially taking into account other potential inter-firm connections. Mechanism analysis suggests that cross-ownership achieves this spillover effect by information transmission between firms. Moreover, the spillover effect is more potent when: (1) the punishment is more serious; (2) the punished firm is state-owned or large; (3) the cross-owner is state-owned, or the cross-owner has a higher proportion of shares in the unpunished firm, or the cross-owner has a larger number of investees; (4) the unpunished firm has more effective internal controls. Overall, our study provides novel evidence that regulatory punishments have significant spillover effects through cross-ownership.