Reforming Private Securities Litigation in China: The Stock Market Has Already Cast its Vote

Abstract

This paper employs a natural experiment research design to analyze the differences in the effects of the 2002 notice concerning private securities litigation issued by the Supreme People’s Court on stock price performance in A/B-share markets. Using a sample of 162 twin A/B-shares issued by 81 listed firms, we find that the portfolio of B-shares, which are treated and held in large volumes, obtains a significant positive treatment effect of 2.08% relative to that of A-shares over a 3-day event window. The treatment effect indicates that the collective action problem undermines the compensatory function of the private enforcement system, which is the primary goal it was designed to achieve. In addition, we look into the determinants of the abnormal return between A/B-shares issued by the same firm and find that the efficiency of the regional court system is positively correlated with the magnitude of the abnormal return. Rational investors expect that the compensation from private litigation is determined by the costs of using the judiciary system.

Keywords: Enforcement; Private Securities Litigation; Event Study; Treatment Effects; A/B-share Markets

JEL Classification: C14; C21; G14; G18; G34; G38; K22