The Myth about Public versus Private Enforcement of Securities Laws – Evidence from Chinese Comment Letters

Prior work based on cross-country evidence reaches different conclusions regarding the efficacy of public versus private enforcement of securities laws (La Porta, Lopez-de-Silanes, and Shleifer 2006; Jackson and Roe 2009). China presents a unique opportunity to study public enforcement of mandatory disclosure when private enforcement is largely absent.

Using a hand-collected sample of comment letters (CLs) on annual reports issued by the Shanghai Stock Exchange, we first show that the price reaction to CL announcements is negative and significant, suggesting that the market views significant deficiency in firms’ mandatory disclosure as bad news. We then show that targeted firms are more likely to amend their annual reports compared to firms not in receipt of CLs. However, we find no significant effect of the Exchange’s oversight on targeted firms’ financial reporting practices, nor do we find any evidence of market discipline in terms of higher costs of capital for those firms.

Finally, we show that targeted firms, especially those receiving more severe CLs, are more likely to receive CLs in the future and are also more likely to be sanctioned by the regulators, consistent with a limited role of the CL review process. We conclude that public enforcement does not achieve its intended objectives when acting alone.

Dr. Kai Li Dr. Li is Senior Associate Dean, Equity and Diversity, and holds the W. Maurice Young Endowed Chair in Finance at the UBC Sauder School of Business.

Dr. Li’s research focuses on the economic consequences of corporate governance mechanisms. Her current research projects explore: (1) the value drivers of mergers and acquisitions, (2) machine learning in finance, and (3) the roles of culture and psychology in corporate decisions. Her research has in Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Journal of Financial and Quantitative Analysis, Management Science, Journal of International Business Studies, and many other leading journals in Finance and Economics. She is the recipient of the 2014 UBC Killam Research Award, the 2008 Sauder School of Business Research Excellence Award, the 2002 Barclays Global Investors Canada Research Award, and the Best Paper Award at many international conferences. She is on seven Editorial Board including Review of Financial Studies, Review of Finance, Journal of Financial and Quantitative Analysis, Management Science. Her research has been featured in Wall Street Journal, New York Times, Washington Post, Financial Times, The Time Magazine, Reuters, CNBC, Bloomberg, Dow Jones Newswire, New Yorker, BBC, BNN, CBC National, National Post, Globe and Mail, U.S. News & World Report, Harvard Business Review, and Yahoo! Finance