External Corporate Governance and Corporate Misconduct: A Meta‐Analysis

ABSTRACT Research Question/Issue External governance parties deter corporate misconduct through their monitoring. External monitoring increases the probability of corporate misconduct being detected and sanctioned. Current research on the relationship between external governance and corporate misconduct remains fragmented across these detection and sanction mechanisms of deterrence. This separation of mechanisms leaves us with an incomplete concept of external monitoring and obscures our understanding of what facilitates monitoring by investors, auditors, analysts, and the media. Research Findings/Insights We integrate the detection and sanction mechanisms of deterrence into a process model of external monitoring. Our meta‐analysis of 188 studies from 14 countries covering the period from 1970 to 2019 identifies proximity, credibility, and attention as common underlying factors that facilitate monitoring by external governance parties. Proximity is of particular relevance in deterring corporate misconduct. Ethical relativism weakens external governance parties' role in deterring corporate misconduct. Theoretical/Academic Implications Parties outside firm boundaries affect public perception of firms, thereby possessing a unique influence on corporate governance. We integrate this form of influence into the concept of external monitoring. Our meta‐analytic synthesis suggests a fundamental role for external governance in preventing corporate misconduct and informs on the relevance of societal values for corporate governance and corporate misconduct.