Reputational Sanctions in China's Securities Market

Abstract

Literature suggests two distinct paths to stock market development: an approach based on legal protections for investors, and an approach based on self-regulation of listed companies by stock exchanges. This paper traces China's attempts to pursue both approaches, while focusing on the role of the stock exchanges as regulators. Specifically, the paper examines a fascinating but unstudied aspect of Chinese securities regulationpublic criticism of listed companies by the Shanghai and Shenzhen exchanges. Based on both event study methodology and extensive interviews of market actors, we find that the criticisms have significant effects on listed companies and their executives. We evaluate the role of public criticisms in China's evolving scheme of securities regulation, contributing to several strands of research on the role of the media in corporate governance, the use of shaming sanctions in corporate governance, and the importance of informal mechanisms in supporting China's economic growth.

Securities Law Violation and Reputation Loss in the Chinese Capital Market

“…It is worth noting that during the regulatory enforcement period (Events 3 to 7), the stock exchange will condemn the fraudulent firm and responsible executives whose misbehaviours have been revealed to the public (Event 5). This public condemnation issued by the exchanges largely complements rather than simply duplicates regulatory enforcement actions of the CSRC (Liebman & Milhaupt, 2008).…”

“…First, in response to Karpoff's (2012) call for research on corporate reputation outside the 7 US market, my study is the first to estimate the magnitude of formal (reputational) sanctions in an emerging country where an incomplete legal system and undue state intervention and control lead to weak capital markets. Although prior research on Chinese corporate misconduct has documented the important role of reputation in the development of the Chinese economy (Huang, 2013;Liebman & Milhaupt, 2008;Zhou, 2014), none has made an attempt to quantify reputation loss. By disaggregating the components of the negative stock price reaction to a corporate misconduct event, I distinguish reputational effects from other regulatory and revaluation effects, thus allowing an accurate calibration of reputation loss in China.…”

“…state ownership and local government intervention) on reputational sanctions. Existing studies have examined the role of the government on the implementation of governance in the judicial process (Firth et al, 2011b); on the likelihood of regulatory enforcement actions (Hou & Moore, 2010;Liebman & Milhaupt, 2008); and on auditor independence (Liu et al, 2011).…”

“…To what extent these reasons account for equity loss in China is unclear (Chen et al, 2005;Liebman & Milhaupt, 2008 …”

“…Firms subject to CSRC or stock exchange enforcement actions are not allowed to issue new stocks over the three years after the regulatory punishment. 6 Such firms usually also have difficulty in obtaining bank loans or in issuing commercial papers (Liebman & Milhaupt, 2008). Due to the weak legal system, civil lawsuits are rare and class 5 If an infraction is deemed to be very minor, the CSRC may simply give the company or securities firm an internal warning.…”