Credibility of Disclosures in Weak Enforcement Institutions: Evidence from Shanghai-Hong Kong Connect

51 Pages Posted: 22 Jun 2017 Last revised: 7 Feb 2018

Date Written: June 12, 2017

Abstract

I study whether voluntary disclosure can be credible when the enforcement institutions to deter managers from engaging in cheap-talk are weak. Using the case of China, I examine the effect of a market liberalization pilot program’s announcement, which increased foreign investors’ future ability to invest in select Shanghai stocks, on affected firms’ disclosure policies. I find that affected firms did not change public disclosure (press releases and management forecasts), but significantly increased private disclosure (corporate access and private dial-ins) in anticipation of the program’s implementation. Private disclosure increases were concentrated among firms in need of capital and these firms experienced an increase in foreign institutional holdings after the implementation. Further, their stock prices suffered less during a subsequent market crash and they retained more foreign institutional investors. Overall, the results suggest that voluntary disclosure supports investor confidence even in weak environments, albeit through private (instead of public) channels.

Keywords: private disclosure, reputation, credibility, institutional investors, market liberalization

JEL Classification: F61, G01, G23, G38, M41

Suggested Citation

Yoon, Aaron, Credibility of Disclosures in Weak Enforcement Institutions: Evidence from Shanghai-Hong Kong Connect (June 12, 2017). Harvard Business School Working Paper. Available at SSRN: https://ssrn.com/abstract=2990145 or http://dx.doi.org/10.2139/ssrn.2990145

Aaron Yoon (Contact Author)

Kellogg School of Management, Northwestern University ( email )

2211 Campus Drive
#4421
Evanston, IL 60201
United States

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