Repression or indulgence? Distinctive government influence on firm financial and environmental misconduct in China

Governments play a debatable role in affecting firm misconduct behaviors since governments can inhibit firm misconduct through supervision but can also enable misconduct by serving as a “protective umbrella.” Our study reconciles the theoretical puzzle by considering the coexistence of either consistent or conflicting pressures from government at multiple levels toward different types of firm misconduct. Drawing on a sample of Chinese publicly listed firms from 2008 to 2014, we find that firms with higher levels of governmental affiliation (owned by higher levels of government) engage in less financial misconduct but engage in more environmental misconduct. Both effects become more salient in regions with a higher governmental bureaucratic capacity. Our study contributes to the misconduct literature in the context of emerging economies by uncovering the impact of the multifaceted state influence on different types of firm misconduct, leading to either united or decoupling responses.