Test on the law protection of minority investors in China: Perspective of misrepresentation in securities market

Abstract

Under the background of effectively building the legal system of the capital market and strengthening investor protection, an evaluation of whether China's legal system's reformations have improved investor protection is of great significance. Based on the lawsuits of 663 listed companies from 1997 to 2021, this paper finds the average annual proportion of listed companies punished by the China Securities Regulatory Commission and prosecuted by the investors is 40%, and since 2017, it has stabilized at around 70%. This paper also finds the “head effect” of the number of investors and claims in the misrepresentation cases over the years and the advantages of China Securities Investor Services Center's support in investor protection. Then, the negative binomial regression method is used to empirically find that investor protection gets better and better with the reformation of China's laws. Reformations in the legal system and key provisions have all led to an increase in the number of sued investors and claims. However, the time of legal proceedings only depends on the reform of the entire legal system. Finally, to reduce litigation costs and make all investors actually receive compensation after being infringed, we should establish the class action mechanism in the future reformation of China's legal system.

The Impact of Agency Problems on Corporate Performance in China

“…With the fast growth in the numbers of individual minority investors, China has been steadily developing a comprehensive legislative framework following the securities market's founding in 1990. According to Fang et al, the completeness of the law is crucial because it is directly linked with the cost of Chinese listed companies as well as the rights of minority shareholders [15]. By adopting a theoretical analysis, Fang et al shows that improving legal frameworks correlates positively with increased litigations and a higher number of inverstor's claims, while inversely related with the duration of legal proceedings [15].…”

“…According to Fang et al, the completeness of the law is crucial because it is directly linked with the cost of Chinese listed companies as well as the rights of minority shareholders [15]. By adopting a theoretical analysis, Fang et al shows that improving legal frameworks correlates positively with increased litigations and a higher number of inverstor's claims, while inversely related with the duration of legal proceedings [15]. As illustrated by Figure 1, this negative binomial regression model strongly affirms the beneficial impact of legal reforms on protecting minority investors.…”