Does the Exercising of Rights by the Regulatory Minority Shareholder Raise the Cost of Equity?

We examine whether and how the exercising of rights by the regulatory minority shareholder impacts firms' cost of equity. Using a hand-collected sample from the CSISC, a novel regulatory investor protection institution controlled by the China Securities Regulatory Commission, we find that the exercising of rights by the CSISC increases firms’ cost of equity; different exercising methods and intensities have distinct regulatory effects. Textual analysis shows that the negative tone of the CSISC’s exercising contributes to an increase in the cost of equity. Cross-sectional analysis shows that the deterrent effect is strong for firms with regulatory alliances. However, strong external and internal governance can mitigate this effect. Further tests find that the enforcement by the CSISC affects the cost of equity through the channels of firm risk and information asymmetry. Collectively, we discover that the regulatory minority shareholder can play a role in emerging markets lacking strong private enforcement mechanisms