Reputational Sanctions in China's Securities Market
Literature suggests two distinct paths to stock market development: an approach based on legal protections for investors, and an approach based on self-regulation of listed companies by stock exchanges. This Essay traces China's attempts to pursue both approaches, while focusing primarily on the role of the stock exchanges as regulators. Specifically, the Essay examines a fascinating but unstudied aspect of Chinese securities regulation--public criticism of listed companies by the Shanghai and Shenzhen exchanges. Based on both event study methodology and extensive interviews of market actors, we find that the public criticisms have significant effects on listed companies and their executives. On both exchanges, significant abnormal stock price returns occur in response to corporate disclosure of the underlying misconduct giving rise to the criticisms, as well as in response to publications of the criticisms themselves. Interviews suggest that the impact of the stock exchange criticisms extends beyond the stock market, as banks and bank regulators make use of the sanction data for their own purposes. We evaluate the role of public criticisms in China's evolving scheme of securities regulation, contributing to several strands of research on the role of the media in corporate governance, the use of shaming sanctions in corporate governance, and the importance of informal mechanisms in supporting China's economic growth.