Understanding Public Enforcement of Securities Law in China: An Empirical Analysis of the Enforcement Outcomes of CSRC’s Regional Offices

The law and finance literature, particularly those studies that use cross-country data (eg, Jackson and Roe (2009); and La Porta et al (2006)), has revealed the importance of enforcement mechanisms in facilitating the development of stock markets. Unfortunately, little attention has been paid to the enforcement institutions in developing countries and emerging markets, including China. Our paper attempts to contribute to the literature by examining the enforcement outputs of Regional Offices (‘ROs’) of the China Securities Regulatory Commission (‘CSRC’), the main public enforcer in the landscape of securities law in China.

China adopts a centralized approach in terms of securities law enforcement, in which the CSRC enjoys a monopoly power in enforcing securities law by, for example, issuing both administrative and non-administrative sanctions without filing a lawsuit in court. The merits and weaknesses of the CSRC’s enforcement have been debated extensively in the literature.  This literature has however overlooked the fact that the CSRC has attempted to increase its enforcement intensity by delegating certain authorities to its 38 ROs. In 2011, a pilot project was launched by the CSRC to delegate the authority of issuing administrative sanctions against minor infractions to the ROs in Guangdong, Shanghai and Shenzhen. In October 2013, all ROs were granted with such authority. In an accompanying study (Xu, Chen and Xu, 2017), we document and investigate the effects of this project.

In this paper, we analyze 442 sanctions issued by ROs between 2011 and 2016, which were disclosed by sanctioned listed firms according to regulatory requirements. Using a shock based research framework of event studies, we find that sanctioned firms experience an abnormal return (‘AR’) of -0.594% on the event date and -0.735% over [0, 1] event window. Furthermore, we employ a controlled firm model to calculate the AR as a robustness check. After adjusting for a vector of firm-specific characteristics, the controlled firm model reports an AR around -0.441% on the event date. The costs (sanctions) imposed by ROs are deemed to be economically negligible by the market, which means that the deterrence effects of ROs’ sanctions may be limited.

We also examine (indirectly) the contributions of private litigation to the AR estimated with the event studies. The 2002 Notice Regarding Accepting Tort Cases Arising from Stock Market False Disclosure issued by the Supreme People’s Court of the People’s Republic of China for the first time allows courts to accept cases against misconduct in information disclosure and require an administrative prerequisite for private actions. Given the possibility that those firms that are sanctioned by ROs for misrepresentation (rather than other misconduct) may be further sued by harmed investors, it is reasonable to assume that such firms may experience a larger negative shock. Indeed, after controlling for firm-specific characteristics, we find that the stocks of firms sanctioned for misrepresentation experience an additional negative shock of -0.75% on the event date.

We hope that our study will enrich the understanding of securities law enforcement in China, and also contribute to the comparative analysis of law and finance.

Wenming Xu is an Assistant Professor at the School of Law and Economics of the China University of Political Science and Law.

Guangdong Xu is an Associate Professor at the School of Law and Economics of the China University of Political Science and Law.