Abstract/Summary

We examine the efficacy of product market discipline as a deterrent to corporate misconduct. Firms that are subject to greater competitive threats in the product market are less likely to commit violations and pay lower penalties. Stakeholders react negatively to various types of violations, with product market competition amplifying these stakeholder reactions. In response, firms under competitive pressure are more likely to incorporate ESG-related incentives into executive compensation, demonstrate better worker safety practices, invest in green innovation, and use credible auditors. Our findings suggest that product market competition deters misconduct by increasing the expected costs associated with violations.