The Regulatory and Capital-Market Effects of a U.S. Approach to Enforcement : Evidence from China

We examine the regulatory and capital-market 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 2013-2018, we show that price reactions to CL receipts and replies are negative and significant. Using topic analysis and KL-divergence to match issues raised by regulators to targeted firms’ changes in disclosure, we show that these firms improve their disclosures without experiencing any significant capital-market effects. Our paper highlights the importance of incentives rather than regulation and enforcement in improving firms’ information environments