Corporate Misconduct and Financial Distress in China: A Multi-Level Governance Perspective

The high-quality development of listed companies is crucial for both corporate sustainability and the stability of capital markets. However, the increasing frequency of corporate misconduct and the threat of financial distress have emerged as significant challenges to market resilience. Using panel data drawn from Chinese A-share firms over 2004–2021, we evaluate the effect of corporate misconduct on financial distress, its transmission mechanisms, and the governance conditions that shape this relationship. The empirical analysis reveals that misconduct leads to tightened financing as well as weakened internal controls, both of which exacerbate firms’ financial vulnerabilities. From a multi-level governance perspective, the results indicate that the misconduct-distress association differs with governance arrangements inside the firm, market-based monitoring, and the surrounding institutional setting. Further analysis by misconduct type indicates that accounting and operational misconduct exert stronger effects on firms’ financial stability. The findings underscore the value of coordinated governance mechanisms and targeted regulatory interventions in preventing misconduct-induced financial distress.