Preventive regulation and corporate financialization: Evidence from China Securities Regulatory Commission's random inspections

Abstract

This study takes CSRC's (China Securities Regulatory Commission) random inspection as a quasi-natural experiment, employs a sample of Chinese A-share listed firms from 2007 to 2021, and tests the impact of a preventive regulation on firms' financialization using a difference-in-differences model (DID). We found that CSRC's random inspection significantly reduces the financialization of entity enterprises, especially over financialization. The mechanism test shows that random inspection can reduce the firms' financialization through two paths: the resource effect, which alleviate financing constraints, and the governance effect, which restrain agency costs and earnings management. Further analysis shows that the mitigating role of the CSRC's random inspection is especially prominent for enterprises faced with more efficient securities regulation, more serious media pressure or executives lack of financial background. Moreover, the CSRC's random inspection have a regional spillover effect. In the economic consequences test, we found that firms' financialization reduces long-term value-creating activities such as R&D investment, innovation output and main business performance, while CSRC's random inspection mitigate such adverse effects. These findings enrich not only the research related to financialization in emerging economies, but also provide meaningful implications for the current securities regulatory system reform in China and other countries in which have implemented or are going to implement the preventive regulatory.