ASLI Working Paper Series

Publication Title The Consequences of Increasing Private Enforcement Intensity in Weak Institutional Environment: Quasi-Natural Experiment Study
Publisher Asian Law Institute
Series WPS050
Publication Date Jul 2023
Author/Speaker Wenming Xu
We examine stock market reactions to the increase in litigation risks against misstatements made by Chinese listed companies. Since the newly revised Chinese Securities Law in December 2019, both the statutory provisions and following judicial rules made by the Supreme People’s Court (SPC) improved the de jure private enforcement intensity. In addition, lower courts awarded historical damages to the aggrieved investors. These events are used as the sources of exogenous shocks to private enforcement intensity. To control for potential self-selection bias, a sample of listed companies in the administrative sanction proceedings prior to the exogenous shocks, which should be trapped by the procedure and shall have the highest likelihood of being suited by the aggrieved investors, are used. The marginal costs for the sample of companies due to increased litigation risks are estimated to be approximately 12% of their market valuation when the de facto enforcement intensity is increased. Finally, the magnitude of the increased costs is estimated to be positively correlated with the local judiciary quality estimated by the percentage of cases disclosed, which suggests that the market expects that listed companies in regions with high-quality judiciary systems will be liable to pay higher damages.
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