Acts of financial misconduct in business affect firms in many negative ways. Therefore, why do certain misdemeanants repeatedly commit these acts? We suggest that financial misdemeanants with different social networks will perceive the costs and benefits of committing financial frauds differently, thereby affecting the likelihood of committing financial frauds in the future. To be specific, we suggest that politically connected misdemeanants are less likely to recommit financial frauds, while misdemeanants at interlock network center are more likely to recommit financial frauds. In addition, we propose that misdemeanants are less likely to recommit financial frauds when their partners in the interlock network community are punished for financial frauds. To test our theory, we collected panel data from Chinese listed firms from 2005 to 2014 and employed event history analysis (EHA).

This article presents a large-scale, systematic study of politically connected firms in China. It was conducted by compiling a database of all the publicly traded firms in China in 1993, 2002 and 2012 that codes the biographies of hundreds of thousands of board members. I find that there has been a significant increase in the percentage of firms that are connected with the national government in the last 20 years. This casts doubt on a popular argument that businesses in China have primarily relied on “local protectionism.” I interpret this as a result of firms' need to connect with powerful and stable institutions. I test this by examining the impact of the fall of Chen Liangyu on firms in Shanghai.