Publication Type

Journal Article

Version

publishedVersion

Publication Date

9-2014

Abstract

This study extends the research on corporate financial fraud by developing a new perspective on the deterrence effects of vicarious punishments premised on social learning theory. We posit that firms vicariously learn about punishments from their peers by picking up modeling cues, environmental cues, and social cues in the inhibitive learning process, thus being deterred from committing future fraudulence. Using a matched sample of 604 observations of Chinese listed firms between 2002 and 2008, our findings show that an observing firm is deterred from committing fraud if the peers in its industry are caught and punished. We further find that such deterrence effects are subject to how the observing firm evaluates the possibility of being caught and the likelihood it will be punished the same way if it violates similar prohibitions. In particular, inhibitive learning effects are positively moderated by punishments of prominent firms and model-observer similarity but negatively attenuated by the development of the legal system. Our study sheds light on the corporate fraud literature by illuminating the indirect, inhibitive learning process from vicarious punishments and identifying the conditions for differential learning/deterrence outcomes of the observing firms.

Keywords

Vicarious learning; Corporate financial fraud; Corporate governance; Social learning theory; Deterrence; China

Discipline

Corporate Finance

Research Areas

Strategy and Organisation

Publication

Organization Science

Volume

25

Issue

5

First Page

1549

Last Page

1571

ISSN

1047-7039

Identifier

10.1287/orsc.2014.0904

Publisher

Institute for Operations Research and Management Sciences

Additional URL

https://doi.org/10.1287/orsc.2014.0904

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