Import Penetration and Corporate Misconduct: A Natural Experiment

Corporate misconduct receives significant attention in the business ethics literature. This paper studies how corporate misconduct is impacted by import penetration from China, which is largely exogenous to the U.S. product market. Using this natural experiment, we find that heightened Chinese import penetration curbs corporate misconduct of U.S. firms. The effect is more pronounced for firms with weaker corporate governance and firms more vulnerable to product market competition. The findings provide implications for firms facing increased import penetration. Firms may consider improving corporate governance and exploring avenues for differentiation as potential strategies to cope with the competition. In addition, we address the exogeneity concern derived from the influence of Chinese value penetration. Furthermore, we find that competition-related policies such as tariff reduction and U.S. granting China Permanent Normal Trade Relations (PNTR) status also lower corporate misconduct. Our work adds to the debates on competition and corporate misconduct in a cross-country competitive landscape.