The Risk-Mitigation Effects of Artificial Intelligence Adoption: Evidence from Executive Misconduct

Executive misconduct poses a persistent challenge to corporate governance, and the rapid diffusion of artificial intelligence (AI) is reshaping how firms monitor, detect, and deter such behavior. Yet, traditional governance mechanisms often suffer from information asymmetry, limited internal oversight, and weak external constraints, leaving misconduct relatively concealed and difficult to discipline. Using Chinese A-share firms listed in Shanghai and Shenzhen from 2010 to 2023, we construct a firm-level AI application index and examine whether and how AI adoption mitigates executive misconduct, as well as its economic consequences. We find that AI application significantly reduces executive misconduct, with robust effects across the incidence of misconduct, the frequency of violations, and the monetary amount of penalties. Mechanism analyses suggest that these risk-mitigation effects operate through four channels: lowering agency costs, strengthening internal control capacity, increasing financial risk exposure, and enhancing external monitoring. We further show that improved governance associated with AI adoption leads to a lower cost of debt financing and higher total factor productivity. This study integrates AI into the corporate governance framework and contributes to the literature on digital technologies and governance by documenting both the governance and real economic benefits of AI. Overall, AI serves not only as a risk-mitigating governance tool but also as a technological foundation for firms’ high-quality development.