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By studying a recent executive corruption case in China (the Bai Peizhong case), which was initially exposed by a theft, later blocked by the local security department, and finally spread through the Internet, this paper first examines the contagion effect of executive corruption and its determinants and transmission mechanism. We find that (1) in response to the news, the stock prices of the two listed companies involved declined over the event window and the negative effect spilt over to their peer companies in the same industries; (2) the above contagion effect was more pronounced in the state-owned peers but was attenuated by the employment of an outside Big Four auditor; (3) the stock prices of the two involved companies declined and their peers’ behaviour was inhibited by the dismissal of Bai Peizhong; (4) the above market reaction was a result of investors’ expectation of the existence of large non-pecuniary compensation in the involved companies and industries; and (5) the contagion effect was not influenced by earnings management or the financial restatement of the peer firms.

Executive Corruption, Contagion Effect, and Investor Protection — Empirical Evidence from the Bai Peizhong Case