6. Conclusion A widely held view in the finance literature is that investor protection in general and law enforcement in particular are vital for corporate financing, financial market development and economic growth. However, the extant literature disagrees on the optimal approaches to law enforcement. La Porta et al. (2006) concludes public enforcement does not work and advocate the adoption of private enforcement while Jackson and Roe (2009) support public enforcement. The objective of this study is to use a natural experiment from China to directly test whether public enforcement matters in improving investor protection for firms domiciled in weak investor protection countries. Specifically, in March 2007 the China Securities Regulatory Commission (CSRC) conducted a one-time Special Public Enforcement Activity on listed compliance with firms’ several important corporate governance regulations issued over the period 2002-2006. We find that the Special Public Enforcement Activity forced our sample firms of 1,094 unique listed firms to disclose more than 10,000 corporate governance noncompliance problems. The most common problems relate to the board of directors and internal control. More importantly, we find that the affected firms claimed to have corrected more than 90% of the disclosed problems by the end of the Special Public Enforcement Activity in late 2008. Based on this evidence, the 2007 Special Public Enforcement Activity is a success. However, we find little evidence that correcting the identified corporate governance problems resulted in a significant increase in shareholder value measured by both operating accounting performance and Q. We also study the effect of the 2007 public Tobin’s enforcement on two important specific outcomes frequently considered in prior literature: controlling tunneling via inter-corporate loans (Jiang et al. 2010) and earnings shareholders’ quality. We find little evidence that the 2007 public enforcement helps reduce tunneling or
6. Conclusion A widely held view in the finance literature is that investor protection in general and law enforcement in particular are vital for corporate financing, financial market development and economic growth. However, the extant literature disagrees on the optimal approaches to law enforcement. La Porta et al. (2006) concludes public enforcement does not work and advocate the adoption of private enforcement while Jackson and Roe (2009) support public enforcement. The objective of this study is to use a natural experiment from China to directly test whether public enforcement matters in improving investor protection for firms domiciled in weak investor protection countries. Specifically, in March 2007 the China Securities Regulatory Commission (CSRC) conducted a one-time Special Public Enforcement Activity on listed firms’ compliance with several important corporate governance regulations issued over the period 2002-2006. We find that the Special Public Enforcement Activity forced our sample firms of 1,094 unique listed firms to disclose more than 10,000 corporate governance noncompliance problems. The most common problems relate to the board of directors and internal control. More importantly, we find that the affected firms claimed to have corrected more than 90% of the disclosed problems by the end of the Special Public Enforcement Activity in late 2008. Based on this evidence, the 2007 Special Public Enforcement Activity is a success. However, we find little evidence that correcting the identified corporate governance problems resulted in a significant increase in shareholder value measured by both operating accounting performance and Tobin’s Q. We also study the effect of the 2007 public enforcement on two important specific outcomes frequently considered in prior literature: controlling shareholders’ tunneling via inter-corporate loans (Jiang et al. 2010) and earnings quality. We find little evidence that the 2007 public enforcement helps reduce tunneling or
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