New Event and Old Antidote: Can Ex-Ante Disclosure Mitigate Regulatory Risk?

54 Pages Posted: 2 Jan 2024 Last revised: 19 Apr 2024

See all articles by Ziyi Li

Ziyi Li

Fudan University - School of Management

Rui Ruan

Central University of Finance and Economics

Yuchen Sun

University of International Business and Economics (UIBE) - School of Banking and Finance

Yue Tang

Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management

Date Written: April 13, 2024

Abstract

This paper addresses the growing concern over the uncertainty caused by unforeseen regulation and asymmetric information between firms and investors. We examine the role of voluntary risk disclosure in mitigating adverse selection problems and panic sell-offs. Specifically, using the Central Environmental Protection Inspection (CEPI) in China as a quasi-experiment, we verify that CEPI increases market recognition of firm-specific risk. Our findings suggest that environmental risk disclosure ex-ante can reduce the increase of bid-ask spreads after CEPI teams’ arrival, indicating its role in weakening information asymmetry. Moreover, we find that the effectiveness of risk disclosure depends on the prevailing information environment and the size of the potential investor base. Additionally, we highlight the importance of disclosure quality after capturing the audience’s attention to sufficiently enable them to interpret. Lastly, our results emphasize the crucial role of risk management capability in ensuring that investors perceive the disclosed information as credible, which facilitates efficient response by the market to the information.

Keywords: Information Asymmetry, Risk Disclosure, Government Regulation, Uncertainty, Market Reaction

JEL Classification: D8, G32, G38, Q56

Suggested Citation

Li, Ziyi and Ruan, Rui and Sun, Yuchen and Tang, Yue, New Event and Old Antidote: Can Ex-Ante Disclosure Mitigate Regulatory Risk? (April 13, 2024). Available at SSRN: https://ssrn.com/abstract=4665267 or http://dx.doi.org/10.2139/ssrn.4665267

Ziyi Li

Fudan University - School of Management ( email )

No. 670, Guoshun Road
Yangpu District, Shanghai 200433
China

Rui Ruan

Central University of Finance and Economics ( email )

Beijing, Beijing 102206
China

HOME PAGE: http://https://ruanrui-econ.github.io/

Yuchen Sun

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Yue Tang (Contact Author)

Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management ( email )

Liulin Campus: 555, Liutai Avenue, Wenjiang Distri
Chengdu, Sichuan 611130
China

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