Does Public Enforcement Matter in Weak Investor Protection Countries? Evidence from a Natural Experiment

Abstract

Exploiting two Chinese corporate governance law enforcement campaigns in 2002 and 2007, we provide insight into how to make public enforcement work in weak institutional environments. Both campaigns aim to enforce the same mandatory Corporate Governance Code but differ in three important aspects. First, the 2007 campaign was more transparent with regard to the disclosure and correction of identified corporate governance noncompliance problems. Second, the 2007 campaign required the CSRC regional offices to be more involved in monitoring the implementation of the public enforcement campaign. Third, the 2007 campaign imposed more binding penalties for firms that fail to timely correct the identified governance noncompliance problems. Our analyses suggest that the 2002 campaign was not successful but the 2007 campaign was in improving publicly listed firms’ corporate governance and shareholder value. Our results suggest that public enforcement, if properly implemented, still matters in increasing shareholder value even in weak investor protection countries.