A Study Of The Impact Of State Ownership On Corporate Misconduct

President Xi Jinping emphasized at the 20 th Party Congress that promoting stateowned capital and state-owned enterprises(SOEs)to become stronger,better,and larger is an inevitable requirement for building a high-level socialist market economy system in China.With a series of strong measures promoted by SOEs centered on mixed ownership reform,China’s state ownership and SOEs have not only efficiently performed their economic and social functions,but the impact of state ownership on corporate governance has also continued to change.The rapid development of firms and the continuous construction of governance systems have put forward requirements for enterprises to maintain legal,compliant,and reasonable operations.According to the announcement of China’s Securities Regulatory Commission,there were 1213 misconduct cases by listed companies in 2022,including 254 cases by state-owned enterprises,accounting for more than one-fifth of the total.What is the role of state ownership,which is held by the state and has important social attributes,in corporate misconduct? Whether it is a defense against misconduct or a vulnerability to governance and regulatory failure that leads to misconduct needs to be further explored.The agency theory connects the topic for state ownership with corporate misconduct.Agency theory suggests that the increase in state ownership raises two types of agency problems that make corporate governance mechanisms ineffective,and that governance distortions and failures provide the preconditions for corporate misconduct to flourish.However,the agency theory rooted in the Western institutional environment has two major limitations in explaining the relationship between state ownership and corporate misconduct in China.First,agency theory presupposes that all parties pursue the maximization of economic interests,but state-owned shareholders and managers in China have strong motivations to pursue organizational legitimacy.Secondly,the occurrence of corporate misconduct will trigger regulatory actions by formal agencies,and regulatory agencies will disclose misconduct announcements to the market and make penalty decisions,which will trigger social repercussions and bring negative feedback and damage organizational legitimacy.Therefore,the impact of state ownership on corporate misconduct needs to be further interpreted with socially constructed theories.Based on the above background,this paper explores the following four research questions:(1)How does state ownership affect corporate misconduct?(2)How does state ownership affect the process of regulatory enforcement against corporate misconduct?(3)How does state ownership affect the market reaction to the announcement of corporate misconduct?(4)How does the implementation of mixed ownership reforms in SOEs affect corporate misconduct?To answer the above four research questions,this paper introduces institutional theory and signaling theory into the field of corporate governance,and designs and conducts four studies.The research hypotheses were tested based on panel data of listed companies in China from 2003-2014.First,state ownership has negative effect on the number of corporate misconduct cases.From an institutional theory perspective,the high legitimacy governance role of state ownership and the three major sources of legitimacy-organizational identity,executive identity,and social expectations-are proposed.Correspondingly,three sources of legitimacy are enhanced when the level of affiliation is higher,when executives are politically connected,and when media coverage to the firm is higher,which in turn strengthens the negative effect of state ownership on the number of misconduct cases.Second,integrating signaling and institutional theoretical perspectives,using a Heckman two-stage model combined with a discrete modeling approach,we find that state ownership affects the regulatory enforcement of corporate misconduct by prolonging the time for misconduct to be disclosed and reducing the severity of the penalties imposed.The moderating effect finds that affiliation level weakens the delaying effect of state ownership on misconduct disclosure but strengthens the negative effect of state ownership on penalty severity.Regional inspection weakens the delayed behavior of regulators in signaling the release of SOEs’ misconduct.Regulators’ differentiated sanction behavior toward SOEs and non-SOEs is weakened when misconduct is more diffuse within the industry.Third,integrating legitimacy theory into the study of economic market reactions,using an event study approach as well as the Heckman two-stage model and OLS regressions,we find that the negative market reactions triggered by misconduct announcements are less negative at higher levels of state ownership.The introduced moderating variables show that affiliation level weakens the positive effect of state ownership on negative market reactions while industry regulation strengthens this effect.Fourth,it is proposed that there is a “decoupling-coupling” effect between the identity of state-owned and non-state-owned shareholders.As the implementation of mixed ownership reform deepens,the two types of shareholder identities become “decoupled” and then “coupled”.Using the negative binomial regression method,the study finds that nonstate ownership has an inverted U-shaped effect on the number of misconduct cases.The inverted U-shaped relationship between non-state shares and the number of misconduct cases flattens when companies receive more media attention and regional inspection is stronger;the relationship becomes more convex when the governance power of newly promoted non-state shareholders is stronger.The research findings build a theoretical system of the influence of state ownership on the vertical chain of corporate misconduct,and purposefully answer the question of the influence mechanism of mixed ownership reform on corporate misconduct,and systematically explore the important roles of state ownership in different stages of corporate misconduct(occurrence,sanction,market,and application).Theoretically,this study realizes a new application of institutional theory to corporate governance in China.Based on the institutional bases of state ownership,key theoretical perspectives such as the legitimacy governance role of state ownership,the relevance of state ownership and regulators,the legitimacy assessment of investors based on state ownership,and the game and integration between the identity of state-owned and non-state-owned shareholders are innovatively proposed.It realizes the new development of theories related to state ownership,institutional theories,and corporate governance in the context of socialist system with Chinese characteristics.In practice,it provides empirical support for the constraining role of state ownership in corporate misconduct,the avoidance role in misconduct sanction,the resistance role in negative market reaction to misconduct and the interactive role with non-state-owned shareholders in mixed ownership reform.It provides important management insights and practical guidance for the construction of the governance system of state-owned capital and SOEs,the enhancement of the regulatory enforcement of the securities market,and the implementation of the mixed ownership reform in China.