Articlebronze2023

A matter of time: The influence of underperformance duration on corporate misconduct

23 citations0/0 files storedCorporate Governance An International Review

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Corporate Governance and Financial Management Corporate Finance and Governance Auditing, Earnings Management, Governance

Abstract

Abstract Research Question/Issue This study examines firms' reactions to the duration of underperformance. We posit that firms are more likely to engage in misconduct to solve the problem of underperformance as the length of time a firm has been underperforming prolongs. Further, we investigate how divergent external governance actors shape underperforming firms' motivation for misconduct and consequently affect their responses to underperformance duration. Research Findings/Insights Using bivariate probit estimations for panel data of 2662 Chinese publicly listed firms during 2007–2018, we uncover that underperformance duration is positively associated with the likelihood of a corporate misconduct commission. In addition, the positive relationship between the duration of firm underperformance and corporate misconduct is mitigated by the level of state ownership but reinforced by the number of analysts covering the firm. Theoretical/Academic Implications This study extends the behavioral theory of the firm by incorporating the construct of underperformance duration from a time perspective, which is a proactive signal of firms' illicit decisions. We show that the duration of underperformance is positively associated with the likelihood of corporate misconduct, which is moderated by the firms' external governance actors who have different time pressures to solve financial problems. Practitioner/Policy Implications This study offers insights for regulators interested in the prevention of ex‐ant misconduct. Identifying underperformance duration as a critical predictor of illegal activities helps to improve regulators' vigilance. Moreover, a holistic executive evaluation system that shows more tolerance for short‐term underperformance is needed.

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References

1980Competitive Strategy: Techniques for Analyzing Industries and Competitors 1979The External Control of Organizations: A Resource Dependence Perspective 2003Earnings Management through Real Activities Manipulation 2003Misery Loves Companies: Rethinking Social Initiatives by Business 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 2005Law, finance, and economic growth in China 2007Socioemotional Wealth and Business Risks in Family-controlled Firms: Evidence from Spanish Olive Oil Mills 1984Dimensions of Organizational Task Environments

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