Security Regulations, Access to Capital Markets, and Firm Performance: Evidence from China

25 Pages Posted: 30 Sep 2020

See all articles by Kun Wang

Kun Wang

Tsinghua University

Zhe Wei

Shenzhen University

xing xiao

Tsinghua University

Kunpeng Sun

Central University of Finance and Economics

Date Written: July-August 2020

Abstract

This study explores the cost of security regulations in China, where firms are required to meet a certain profitability benchmark before applying for permission to raise more equity via secondary equity offerings (SEOs). Using a difference‐in‐differences setting, we show that firms affected by the regulation (i.e., firms with high external financing demands (EFD) but profitability lower than the regulatory requirement) significantly underperform their counterparts, while unaffected firms do not. The affected firms’ performance decline increases (decreases) when the requirement of profitability is more (less) restricted. Consistently, the three‐day cumulative abnormal return (CAR) of firms with high EFD is significantly negative (positive) when the regulation is tightened (loosened). Our study provides evidence on how the cost of regulation affects companies that have growth opportunities.

Keywords: capital market, cost of regulation, external financing demands (EFD), firm performance, secondary equity offerings (SEOs)

JEL Classification: G38, M41

Suggested Citation

Wang, Kun and Wei, Zhe and xiao, xing and Sun, Kunpeng, Security Regulations, Access to Capital Markets, and Firm Performance: Evidence from China (July-August 2020). Journal of Business Finance & Accounting, Vol. 47, Issue 7-8, pp. 1034-1058, 2020, Available at SSRN: https://ssrn.com/abstract=3700033 or http://dx.doi.org/10.1111/jbfa.12432

Kun Wang

Tsinghua University

Beijing, 100084
China

Zhe Wei (Contact Author)

Shenzhen University ( email )

3688 Nanhai Road, Nanshan District
Shenzhen, Guangdong 518060
China

Xing Xiao

Tsinghua University

Kunpeng Sun

Central University of Finance and Economics

770 Middle Road
Dresden, ME 04342
United States

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