Enforceability and the Effectiveness of Laws and Regulations

44 Pages Posted: 9 May 2012 Last revised: 17 Feb 2019

See all articles by Ke Li

Ke Li

Shanghai Stock Exchange

Lei Lu

Asper School of Business, University of Manitoba

Jun Qian

Fanhai International School of Finance, Fudan University; University of Pennsylvania - Wharton Financial Institutions Center

Julie Lei Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Multiple version iconThere are 2 versions of this paper

Date Written: February 18, 2014

Abstract

Controlling shareholders in China can divert assets from listed firms or coerce firms to serve as guarantors on questionable loans. A new rule was enacted prohibiting diversion for ‘non-operational’ purposes, and firms complying with this rule experienced a reduction in related party transactions, an increase in investment and dividends, and better performance. Another contemporary rule aimed to standardize practice of firms providing loan guarantees, but had no impact on firms. Our results highlight the importance of enforceability: laws and regulations that can be enforced at lower costs are more likely to succeed, especially in countries with weak formal institutions.

Keywords: Enforceability, controlling shareholder, tunneling, loan guarantee, asset diversion

JEL Classification: G30, G34, K42

Suggested Citation

Li, Ke and Lu, Lei and Qian, Jun and Zhu, Lei, Enforceability and the Effectiveness of Laws and Regulations (February 18, 2014). Available at SSRN: https://ssrn.com/abstract=2053804 or http://dx.doi.org/10.2139/ssrn.2053804

Ke Li

Shanghai Stock Exchange ( email )

Shanghai 200120
China

Lei Lu

Asper School of Business, University of Manitoba ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Jun Qian (Contact Author)

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States

HOME PAGE: http://fic.wharton.upenn.edu/fic/

Lei Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Register to save articles to
your library

Register

Paper statistics

Downloads
100
Abstract Views
903
rank
204,756
PlumX Metrics