Political Connections and Minority-Shareholder Protection: Evidence from Securities-Market Regulation in China

46 Pages Posted: 25 Mar 2008 Last revised: 1 Mar 2011

Henk Berkman

University of Auckland - Business School

Rebel A. Cole

College of Business--Florida Atlantic University

Jiang Lawrence Fu

Standard Charter Bank

Date Written: June 7, 2009

Abstract

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.

Keywords: China, corporate governance, enforcement, expropriation, political connections, investor

JEL Classification: G32, G34, G38, G12, G15

Suggested Citation

Berkman, Henk and Cole, Rebel A. and Fu, Jiang Lawrence, Political Connections and Minority-Shareholder Protection: Evidence from Securities-Market Regulation in China (June 7, 2009). Journal of Financial and Quantitative Analysis (JFQA), Vol. 45, No. 6, pp.1391-1417, 2010; AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1029886

Henk Berkman

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Rebel A. Cole (Contact Author)

College of Business--Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

Jiang Lawrence Fu

Standard Charter Bank ( email )

Hong Kong
China

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