In recent years, amidst the emergence of numerous peer supervision incidents, companies within the same industry have gradually become significant external entities in corporate governance. Using the case of Gree exposing AUX’s fraudulent energy efficiency labeling, this article proposes a theoretical framework for the costs and benefits of the dual effects of competition and social capital under peer supervision in the Chinese context. Based on this framework, this paper specifically analyzes the motivations, influences, and mechanisms of peer supervision. The paper finds that, in this particular peer supervision incident, the social capital effect played a stronger role than the competitive effect, initially causing a decline in stock prices for both the supervising and supervised firms. Following the verification of the supervision results by the regulators, the supervising party gained market understanding and support, resulting in an increase in stock price, while the stock price of the supervised party declined further. In the long run, peer supervision played a governance role, prompting the supervised party to make positive changes and urging regulatory authorities to strengthen supervision of the entire industry, ultimately maintaining market order and promoting environmentally-friendly development. This article expands the research on external corporate governance, providing valuable insights for supervising parties, supervised parties, regulatory agencies, and investors in the context of peer supervision. Additionally, it offers a fundamental framework for subsequent studies on the governance effects of peer supervision in the Chinese context.