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

The objective of this study is to use a large-scale one-off public enforcement activity conducted by the Chinese securities regulator in 2007 to test the causal effect of public enforcement on shareholder value. We find that the public enforcement activity forced publicly listed Chinese firms to disclose more than 11,600 corporate governance noncompliance problems and correct more than 90% of the disclosed problems by the end of the public enforcement activity in 2008. We find that correcting the disclosed corporate governance problems helps reduce controlling shareholders' tunneling, increases the earnings response coefficient, and results in improved future accounting performance. Overall, our results suggest that public enforcement is an effective enforcement mechanism in inducing corporate insiders to maximize shareholder value in weak investor protection countries.