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Security regulations, access to capital markets, and firm performance: Evidence from China

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  • Kun Wang
  • Zhe Wei
  • Xing Xiao
  • Kunpeng Sun

Abstract

This study explores the cost of security regulations in China, where firms are required to meet a certain profitability benchmark before applying for permission to raise more equity via secondary equity offerings (SEOs). Using a difference‐in‐differences setting, we show that firms affected by the regulation (i.e., firms with high external financing demands (EFD) but profitability lower than the regulatory requirement) significantly underperform their counterparts, while unaffected firms do not. The affected firms’ performance decline increases (decreases) when the requirement of profitability is more (less) restricted. Consistently, the three‐day cumulative abnormal return (CAR) of firms with high EFD is significantly negative (positive) when the regulation is tightened (loosened). Our study provides evidence on how the cost of regulation affects companies that have growth opportunities.

Suggested Citation

  • Kun Wang & Zhe Wei & Xing Xiao & Kunpeng Sun, 2020. "Security regulations, access to capital markets, and firm performance: Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 1034-1058, July.
    • Handle: RePEc:bla:jbfnac:v:47:y:2020:i:7-8:p:1034-1058
    DOI: 10.1111/jbfa.12432
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