Corporate Governance, Political Connections, and Intra‐Industry Effects: Evidence from Corporate Scandals in China

This paper investigates intra‐industry spillover effects of corporate scandals in China. We demonstrate how a contagion effect spreads to peer firms depending upon the quality of corporate governance and their political connections. Good corporate governance in peer firms reduces the contagion effect of scandals. External governance has a stronger influence on reducing the contagion effect of both financial and non‐financial scandals, while ownership concentration and the quality of auditors play a more pronounced role in mitigating the contagion effect of financial scandals. State ownership helps to mitigate the negative influence of non‐financial scandals in individual‐owned firms, but not in state‐owned enterprises.