Political Connections and Minority-Shareholder Protection: Evidence from Securities-Market Regulation in China
University of Auckland - Business School
Rebel A. Cole
Florida Atlantic University
Jiang Lawrence Fu
Standard Charter Bank
June 7, 2009
Journal of Financial and Quantitative Analysis (JFQA), Vol. 45, No. 6, pp.1391-1417, 2010
AFA 2009 San Francisco Meetings Paper
We examine the wealth effects of three regulatory changes designed to improve minority-shareholder protection in the Chinese stock markets. Using the value of a firm's related-party transactions as an inverse proxy for the quality of corporate governance, we find that firms with weaker governance experienced significantly larger abnormal returns around announcements of the new regulations than did firms with stronger governance. This evidence indicates that securities-market regulation can be effective in protecting minority shareholders from expropriation in a country with weak judicial enforcement. We also find that firms with strong ties to the government did not benefit from the new regulations, suggesting that minority shareholders did not expect regulators to enforce the new rules on firms where block holders have strong political connections.
Number of Pages in PDF File: 46
Keywords: China, corporate governance, enforcement, expropriation, political connections, investor
JEL Classification: G32, G34, G38, G12, G15
Date posted: March 25, 2008 ; Last revised: March 1, 2011
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