Mandatory internal control and capital market information efficiency: Evidence from China’s staggered regulatory reform

This study examines the impact of China’s mandatory internal control system on capital market information efficiency. In August 2012, the Ministry of Finance and the China Securities Regulatory Commission (CSRC) jointly issued the “Notice on the Phased and Categorized Implementation of the Enterprise Internal Control Standard System for Main Board Listed Companies in 2012” (MIC), marking a transition from voluntary to mandatory internal control regimes. Leveraging the staggered implementation of this policy across different firm types, we employ a staggered difference-in-differences design using panel data of Chinese A-share listed firms from 2009 to 2014. We find that the MIC significantly reduces stock price synchronicity, with an approximate 23% decrease relative to the sample mean. Mechanism tests reveal that this effect operates through reductions in information asymmetry and improvements in corporate governance. Further analyses demonstrate that the policy-induced reduction in synchronicity lowers stock price crash risk, enhances investment efficiency, and increases total factor productivity. Our findings remain robust to parallel trends tests, placebo analyses, propensity score matching, and alternative estimation methods addressing treatment effect heterogeneity. Our findings provide causal evidence from an emerging market that mandatory internal control systems improve capital market information efficiency.