Comply-or-Explain Regulation and Investor Protection

Journal of Accounting and Economics, Forthcoming

88 Pages Posted: 14 May 2023 Last revised: 1 Jan 2025

See all articles by Thomas Bourveau

Thomas Bourveau

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Xingchao Gao

University of Toronto - Rotman School of Management

Rongchen Li

Columbia University - Columbia Business School

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: December 23, 2024

Abstract

We investigate a 2012 comply-or-explain regulation implemented by China's Shanghai Stock Exchange. The regulation requires eligible firms to pay 30% of their current-year profits as cash dividends or explain the reasons why they do not meet this requirement through a public conference call. Using firms listed on the Shenzhen Stock Exchange as a control group, our difference-in-differences estimates suggest that firms subject to the regulation decreased tunneling, irrespective of whether they complied by paying or disclosing. Further analyses suggest that the reduction in tunneling is partially attributed to enhanced regulatory monitoring over explaining firms and the constraint on excess cash of paying firms. These findings offer novel policy insights into how a flexible comply-or-explain form of regulation can mitigate agency costs between controlling and minority shareholders in a weak institutional environment.

Keywords: Comply or Explain, Investor Protection, Payout Policy, Disclosure Regulation, Corporate Governance

JEL Classification: G15, G35, G38, M48

Suggested Citation

Bourveau, Thomas and Gao, Xingchao and Li, Rongchen and Zhou, Frank, Comply-or-Explain Regulation and Investor Protection (December 23, 2024). Journal of Accounting and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4436460 or http://dx.doi.org/10.2139/ssrn.4436460

Thomas Bourveau (Contact Author)

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Xingchao Gao

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Rongchen Li

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Frank Zhou

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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