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The Effects of a U.S. Approach to Enforcement: Evidence from China

Published online by Cambridge University Press:  22 March 2023

Tinghua Duan Open the ORCID record for Tinghua Duan [Opens in a new window] ,
Kai Li Open the ORCID record for Kai Li [Opens in a new window] ,
Rafael Rogo Open the ORCID record for Rafael Rogo [Opens in a new window]  and
Ray Zhang
Tinghua Duan
Affiliation:
University of Lille and LEM-CNRS 9221 IESEG School of Management t.duan@ieseg.fr
Kai Li*
Affiliation:
University of British Columbia Sauder School of Business
Rafael Rogo
Affiliation:
University of Cambridge Judge Business School r.rogo@jbs.cam.ac.uk
Ray Zhang
Affiliation:
Simon Fraser University Beedie School of Business ray_zhang@sfu.ca
*
kai.li@sauder.ubc.ca (corresponding author)
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Abstract

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We examine the effects of implementing a U.S. approach to the enforcement of mandatory disclosure in China. Using a hand-collected sample of comment letters (CLs) issued by the Shanghai Stock Exchange over the period of 2013 to 2018, we show that stock price reactions to CL receipts and replies are negative and significant. Using textual analysis to match issues raised by regulators to targeted firms’ changes in disclosure, we show that these firms do address CL issues point by point, but do not experience significant improvements in their information environments. Our article highlights the importance of incentives rather than regulation/enforcement in reducing information asymmetry.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 1 , February 2024 , pp. 121 - 156
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We gratefully acknowledge helpful comments from an anonymous referee, Pat Akey, Cindy Alexander, Leslie Armijo, Tara Bhandari, Sandra Chamberlain, Simba Chang, Daniel Chi, Dennis Chung, Richard Crowley (discussant), Jo Danbolt (discussant), Craig Doidge, Ying Duan, Alexander Dyck, Mara Faccio (the editor), Yianni Floros, Paul Guest, Xiaoting Hao, Justin Hopkins (discussant), Jun Huang, Wei Huang, Ping Jiang (discussant), Bjorn Jorgensen, Marcin Kacperczyk, Diana Knyazeva, Timo Korkeamäki, Alan Kwan (discussant), Bing Li, Jing Li, Weikai Li, Nian Liu, Matthijs Lof, Hai Lu, Feng Mai, Brian Miller, Jim Naughton, Louis Nguyen, Bunyamin Önal, Vesa Pursiainen, Ghon Rhee, Tianyue Ruan (discussant), Rui Shen, Dan Simunic, Xiaoli Tian, Kate Volkova, Jason Wei, T. J. Wong (discussant), Heng Yue, Eliza Zhang, Tianyu Zhang, Mengxin Zhao, Xin Zheng, and Qinlin Zhong, seminar participants at Aalto University, Bank of Finland, Central University of Finance and Economics, Chinese University of Hong Kong-Shenzhen, City University Hong Kong, Faihan International School of Finance, George Washington University, Hanken School of Economics, Higher School of Economics, Hong Kong University of Science and Technology, Imperial College London, Indiana University, King’s College London, Peking University, Queen’s University, Renmin University, the Securities and Exchange Commission, Shanghai University of Finance and Economics, Simon Fraser University, Tongji University, UCLA, UBC, University of Alabama, University of Cambridge, University of Hawaii, University of Massachusetts Amherst, University of Nevada, Las Vegas, University of Wisconsin – Milwaukee, University of Toronto, UIBE, and conference participants at the 2019 Annual Congress of the European Accounting Association, the 2019 Annual Conference of Asian Bureau of Finance and Economics Research, the 2019 Annual Meeting of the European Financial Management Association, the 2019 China Financial Research Conference, the 2019 China International Conference in Finance, the 2019 Northern Finance Association Meetings, the 2019 SFS Cavalcade Asia-Pacific Conference, and the 2021 Shanghai Financial Forefront Symposium. We thank Sukiy Chen, Xintong Jiang, Shishi Li, Xing Liu, Zheng Peng, Meng Qu, Jingru Yang, Ben Zhang, and Teresa Zhu for their research assistance. Duan acknowledges the warm hospitality of the NYU Stern School of Business where he was a visiting scholar when this project first started. Li acknowledges financial support from the Social Sciences and Humanities Research Council of Canada (Grant Number: 435-2018-0037), the PH&N Center for Financial Research/Bureau of Asset Management, the Beijing Outstanding Young Scientist Program (BJJWZYJH01201910034034), and the 111 Project (B20094). Zhang acknowledges financial support from the Chartered Professional Accountants of British Columbia. All errors are ours.

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