Punish One, Teach a Hundred: The Sobering Effect of Peer Punishment on the Unpunished

Direct experience of a peer’s punishment might have a sobering effect above and beyond deterrence (information about punishments). We test this mechanism in China, studying the reactions to listed state-owned enterprises’ (SOEs) punishments for fraudulent loan guarantees by firms in the same location (peers) and nonpeer firms across SOEs and non-SOEs. After experiencing SOEs’ punishments, peer SOEs cut their loan guarantees by more than nonpeer SOEs and peer non-SOEs even if information and local economic shocks are common to all firms. The reaction is stronger for peer SOEs whose CEOs have higher career concerns and/or face lower costs of reducing loan guarantees. This paper was accepted by Bo Becker, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03309 .