Comment Letters, Regulatory Scrutiny and Investment Efficiency: Evidence from China

Abstract

This study investigates the impact of stock exchanges’ comment letters on investment efficiency using a sample of listed Chinese firms. We find that comment letter regulation significantly improves firms’ investment efficiency. This regulation effectively mitigates over-investments while not significantly curbing under-investments. Importantly, the regulatory influence of comment letters is most prominent in contexts where market oversight mechanisms are weak. This suggests that stock exchanges’ regulatory scrutiny complements market monitoring, fostering improved investment practices. A mechanism analysis reveals that comment letters improve investment efficiency by reducing information asymmetry, enhancing managerial accountability, and fostering political alignment.

Keywords: Comment letters, Regulatory scrutiny, Corporate investment efficiency, Market mechanism