Comply-or-Explain Regulation and Investor Protection
Journal of Accounting and Economics, Forthcoming
88 Pages Posted: 14 May 2023 Last revised: 1 Jan 2025
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: Suggested Citation