The Effects of Reputational Sanctions on Culpable Firms: Evidence From China’s Stock Markets
Posted: 19 Feb 2021
Date Written: December 18, 2020
reputational sanctions are widely used as a regulatory tool to curb corporate misconduct. However, existing literature on its workings and effectiveness is largely limited to developed economies. This paper thus endeavours to examine the case of China, focusing on public criticisms imposed on culpable firms by the two Chinese stock exchanges in Shanghai and Shenzhen. Public criticism is an important yet understudied form of reputational sanction, and thanks to its unique features, presents a very good opportunity to quantitatively measure the scale of reputational damage. This paper constructs a unique dataset of all public criticisms announced by the two Chinese stock exchanges from 2013 to 2018, providing empirical evidence on the stock price effects of reputational sanctions on culpable firms for their corporate misconduct. The paper uses event study and shows significantly negative cumulative abnormal returns around the announcement date of public criticisms, which demonstrate the general effectiveness of reputational sanctions. Further tests, however, suggest that the significant negative market reaction only appears in the firms relying on external financing and those not controlled by state ownership. Importantly, the market reaction is not significant in cases where the firm had already self-exposed misconduct before the announcement of public criticisms by the stock exchange. Cross-sectional regression analysis finds that there are several factors affecting the effectiveness of public criticisms in a statistically significant way, including financing propensity, governance mechanism, and equity nature. Our findings suggest that reputational sanctions function better towards the firms with more reliance on reputational capital. In light of the empirical findings, some policy recommendations are made to improve the effectiveness of reputational sanctions.
Keywords: Reputational sanctions; Public criticisms; Event study; Corporate governance; Regulatory enforcement; Chinese stock markets
JEL Classification: G15, K22
Suggested Citation: Suggested Citation