Do Product Market Threats Discipline Corporate Misconduct?

We examine the efficacy of product market discipline as a deterrent to corporate misconduct. Firms that are subject to greater competitive threats in the product market are less likely to commit violations and pay lower penalties. Stakeholders respond negatively to various types of violations, leading to adverse consequences in the product, labor, and capital markets, with product market competition amplifying these stakeholder responses. Firms under competitive pressure are also more likely to incorporate ESG-related incentives into executive compensation and demonstrate better worker safety practices. Our findings suggest product market competition deters misconduct by increasing the expected costs associated with violations.

Keywords: Product market threats, Market competition, Corporate governance, Corporate misconduct

JEL Classification: G30, G34, L10, D22

Suggested Citation: Suggested Citation

Chen, Jie and Su, Xunhua and Tian, Xuan and Xu, Bin and Zhang, Xiaoyu, Do Product Market Threats Discipline Corporate Misconduct? (January 5, 2024). Leeds University Business School Working Paper, Available at SSRN: https://ssrn.com/abstract=4413274 or http://dx.doi.org/10.2139/ssrn.4413274