Political corruption imposes substantial costs on shareholders in the U.S. Yet, we understand little about the basic factors that exacerbate or mitigate the value consequences of political corruption. Using federal corruption convictions data, we find that firm-level economic rents and monitoring mechanisms moderate the negative relation between corruption and firm value. The value consequences of political corruption are exacerbated for firms operating in low-rent product markets and mitigated for firms subject to external monitoring by state governments or monitoring induced by (...) disclosure transparency. Our results should inform managers and policymakers of the tradeoffs imposed on firms operating in politically corrupt districts. (shrink)

This paper provides a systematic analysis of how hometown ties, the most common and distinct bases for interpersonal ties to build upon in China, could influence corporate governance in Chinese corporations by focusing on its impact on CEO dismissals and corporate social responsibility. We find that hometown ties between CEOs and board chairs reduce the likelihood of CEO dismissals and that the negative relationship between firm performance and CEO dismissals is weaker for hometown-connected CEOs in locally administered state-owned enterprises, for (...) inside CEOs, for firms located outside board chairs’ hometowns, and for firms operating in regions with low social trust. Moreover, we find consistent evidence that hometown ties affect Chinese firms’ engagement in corporate social responsibility. Our study highlights the important role of hometown ties in Chinese relationship-based corporate governance. It also advances a normative ethical assessment of hometown-based favoritism by highlighting its distinct dynamics and impacts on focal actors and the third parties in specific contexts of actions. (shrink)

We propose a construct, the Trust Triangle, that highlights three primary mechanisms that provide ex post accountability for opportunistic behavior and motivate ex ante trust in economic relationships. The mechanisms are a society’s legal and regulatory framework, market-based discipline and reputational capital, and culture, including individual ethics and social norms. The Trust Triangle provides a framework to conceptualize the relationships between trust, corporate accountability, legal liability, reputation, and culture. We use the Trust Triangle to summarize recent developments in the empirical (...) finance literature that examine how trust is formed and how trust, or its absence, affects financial markets, firm performance, and the incidence of financial fraud. To date, most studies examine only one leg of the Trust Triangle in isolation. The evidence, however, indicates that all three legs of the Trust Triangle have first-order effects on a wide range of financial outcomes and that they are interrelated. Attempts to model trust and trustworthiness that do not incorporate all three aspects of the Trust Triangle will therefore miss essential aspects of the basic economic problem of how counterparties overcome the risks of moral hazard, asymmetric information, and opportunism to engage in mutually beneficial exchange and production activities. We focus especially on culture-related mechanisms, a recently developed area in empirical finance research that has potential to influence the more established research on laws and reputation. (shrink)

In countries such as China, where Confucianism is the backbone of national culture, high-social-status entrepreneurs are inclined to engage in corporate social responsibility activities due to the perceived high stress from stakeholders and high ability of doing CSR. Based on a large-scale survey of private enterprises in China, our paper finds that Chinese entrepreneurs at private firms who have high social status are prone to engage in social responsibility efforts. In addition, high-social-status Chinese entrepreneurs are even more likely to engage (...) in social responsibility efforts as they become more politically connected and as the region becomes more market-oriented. These findings extend the upper echelons perspective of CSR into Chinese context by shedding light on antecedents of CSR from a new perspective and clarifying the boundary conditions of the social status–CSR link from the institutional perspective. (shrink)

This study aims to enrich our understanding of the relationship between political connections and the adoption of environmental corporate socially responsible investments. In addition to the individual-level political connections, i.e., entrepreneurs’ personal ties to government officials, we propose in China the creation of Communist Party of China branches in privately owned firms serve as organizational and institutionalized dimensions of political connection building. Drawing on the social exchange theory, this paper details how CPC branches function in privately owned firms and how (...) entrepreneurs are motivated by the reciprocal logic to engage in ECSR. We also supplement this main effect by examining the boundary conditions of it at the firm and regional level. Using a dataset with 17,690 firm observations in China, we find that the existence of CPC branches gives rise to the ECSR investments and the firm-level contingencies such as centralized governance and financial constraints, and the regional-level contingencies such as the development of the market system, are important moderators that shape the association of political links and ECSR investments. These findings have ample implications to understand the ECSR activities and extend social exchange theory beyond the individual level on which it is typically applied. (shrink)

The role of board secretaries is a unique institutional feature in China. Individuals in this senior executive role are responsible for coordinating information disclosure. We study the impact of board secretaries on management earnings forecasts and find that their legal expertise, accounting expertise and foreign experience help improve management earnings forecast quality. The quality of forecasts, as indicated by their occurrence, frequency, precision and accuracy, is also positively associated with the role duality and equity holdings of board secretaries and negatively (...) associated with their political connection. The quality of forecasts is found to increase the compensation of board secretaries. Finally, we show that the equity holding of board secretaries reduces litigation risks and increases corporate philanthropic giving. (shrink)