Can a Not-for-Profit Minority Institutional Shareholder Make a Big Difference in Corporate Governance? A Quasi-Natural Experiment
59 Pages Posted: 13 Nov 2020 Last revised: 6 Dec 2021
Date Written: September 24, 2020
In this study, we examine the effectiveness of the China Securities Investor Service Center (CSISC), a new minority shareholder protection mechanism promoted by the China Securities Regulatory Commission, in constraining earnings management. Employing a difference-in-differences analysis for a sample of Chinese listed companies during 2015-2017, we find that CSISC shareholding reduces earnings management. We also find that this effect exists when the internal and external corporate governance mechanisms of listed companies are weaker. Furthermore, our empirical evidence indicates that restraining tunneling is a channel through which the CSISC affects earnings management. The additional analyses show that the CSISC-holding firms (i.e., treatment firms) exhibit higher cumulative abnormal returns around the announcement of the CSISC shareholding pilot program than the control firms, and the difference in earnings management between the treatment and control firms is diminishing after the pilot program was promoted nationwide. Our findings have important policy implications for emerging markets that attempt to improve minority shareholder protection.
Keywords: China Securities Investor Service Center, Corporate Governance, Minority Shareholder Protection, Earnings Management, Tunneling
JEL Classification: G32, G38, M41
Suggested Citation: Suggested Citation