Government Control, Regulatory Enforcement Actions, and the Cost of Equity

Kun Tracy Wang*, Yanjun Liu, Wanbin Walter Wang

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    11 Citations (Scopus)

    Abstract

    Using a comprehensive manually collected dataset of regulatory enforcement actions against fraud in the Chinese capital market and a difference-in-differences (DID) research design, we examine the impact of such actions on the implied cost of equity and the role of the government as the controlling shareholder in moderating this relationship. We find that regulatory enforcement actions increase firms’ cost of equity, and that government controlling shareholders can mitigate the effect of these actions. Our results are robust to various sensitivity tests, including alternative measures of the cost of equity, alternative samples, additional control variables, and an alternative DID design. Additional analysis provides supporting evidence that the effect of enforcement actions on the cost of equity arises from investors’ perception of higher long-run information risk in the case of fraud firms. Further, government controlling shareholders can mitigate the impact of such actions on the cost of equity by lowering investors’ perceived information risk.

    Original languageEnglish
    Pages (from-to)449-493
    Number of pages45
    JournalEuropean Accounting Review
    Volume31
    Issue number2
    DOIs
    Publication statusPublished - 2022

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