The ethical issues in the growth of enterprises have always been the focus of practice and academia, and the existence of enterprises is closely related to their morality. This paper analyzes the negative effect of immoral irregularities on organizational performance from the perspective of enterprise legitimacy, especially the repairing effect of the governance mechanism（supervision and punishment mechanisms）.
Based on the illegal data of Chinese listed companies from 1994 to 2013, this paper gets the following conclusions: First, the revelation of immoral irregularities incurs a great negative effect to the subsequent financial（ROA）and marketing（Tobin’s Q）performance. Second, the enhancement of the supervision mechanism（improvement of board independence and investment institution shareholdings）can repair violation behaviors’ negative effect on the subsequent performance. Third, the improvement of the punishment mechanism（CEO replacement）also plays a repairing role on violation behaviors’ negative outcomes, for the public regard CEO replacement as a representation that the original organization has been changed, which can reduce the negative impact of legitimacy loss on performance. Fourth, institutional investors’ supervision plays a relatively more stable role in weakening and repairing the negative effect of marketing irregularities, while CEO replacement has a more significant repairing effect on both types of irregularities. This study shows when enterprises’ immoral irregularities are announced, the improvement of supervision and punishment mechanisms plays a significant role in repairing enterprises’ legitimacy and the subsequent operating performance.
By introducing the two aspects of the governance mechanism, supervision and punishment into the research framework, this paper examines the role played by the improvement of the two mechanisms in repairing enterprise legitimacy and weakening immoral irregularities, making the following research contributions: On the one hand, it deeply analyzes the effect of immoral irregularity revelation on the subsequent operational performance at the enterprise level, rather than at the stock market level. On the other hand, this paper focuses on whether and how the improvement of supervision and punishment mechanisms restores enterprise legitimacy, and alleviates the negative effect of immoral irregularities, more than only discussing the negative effect and its degree after the immoral irregularities exposed. There are also some shortcomings in the study. While the direct cost faced by enterprises after immoral irregularity revelation cannot be obtained, it is impossible to distinguish and test the differences between direct and indirect effects of the uncovered immoral irregularities, but these are topics that deserve further study.
The managerial implications of this article are listed as follow: First, enterprises must regulate their business activities and avoid immoral irregularities for their long-term survival and development. Second, enterprises can prevent immoral irregularities from happening through strengthening the supervision mechanism such as the improvement of the independence and supervisory initiative of the board of directors. Third, the punishment mechanism should be reinforced when enterprises’ violation behaviors are announced, for this kind of behaviors can help enterprises get out of the scandals as soon as possible.