Has Punishment a Spillover Effect on the Unpunished via Cross-ownership?

Relying on a comprehensive sample of Chinese listed companies from 2007 to 2020 and the PSM-DID method, we examine whether punishments from the China Securities Regulatory Commission (CSRC) affect the behavior of firms that are not punished but shares a cross-owner with the punished. We find that a firm's probability of misconduct drops significantly after its cross-held firm is punished, ceteris paribus. Mechanism analysis suggest that cross-owners achieve this effect by information transfer between firms. Besides, spillovers are stronger when the punishment is more serious, the size of the cross-held firm is larger, the cross-held firm is state-owned, and the internal controls are more rigorous in the focal firm. Finally, our results survive a battery of robustness tests and the horse-race test. Overall, our study reveals that regulatory punishments have significant spillover effects through cross-owners