IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v74y2025ics1544612324017537.html
   My bibliography  Save this article

Randomized inspection and investment-price sensitivity: A natural experiment in China

Author

Listed:
  • Xie, Lina
  • Wang, Chenxi

Abstract

This study examines the impact of randomized inspection on the investment-price sensitivity. We find that the random inspection of China Securities Regulatory Commission (CSRC) increases the inspected companies’ investment-price sensitivity. The CSRC’s random inspection enhances the investment-price sensitivity by increasing the stock price informativeness and strengthening corporate governance. The effect of CSRC’s random inspections on investment-price sensitivity is more pronounced among firms with poorer information quality and higher agency costs. The study reveals the role of securities regulation in improving the investment-price sensitivity and thus provides implications for policymakers.

Suggested Citation

  • Xie, Lina & Wang, Chenxi, 2025. "Randomized inspection and investment-price sensitivity: A natural experiment in China," Finance Research Letters, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:finlet:v:74:y:2025:i:c:s1544612324017537
    DOI: 10.1016/j.frl.2024.106724
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612324017537
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2024.106724?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Clément de Chaisemartin & Xavier D'Haultfœuille, 2020. "Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects," American Economic Review, American Economic Association, vol. 110(9), pages 2964-2996, September.
    2. Biddle, Gary C. & Hilary, Gilles & Verdi, Rodrigo S., 2009. "How does financial reporting quality relate to investment efficiency?," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 112-131, December.
    3. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(1), pages 25-46, January.
    4. Farooq, Omar & Ahmed, Neveen, 2018. "Does inflation affect sensitivity of investment to stock prices? Evidence from emerging markets," Finance Research Letters, Elsevier, vol. 25(C), pages 160-164.
    5. Jinyang Liu, 2023. "CSRC’s supervision and corporate investment efficiency—based on the random inspection," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 11(4), pages 897-920, October.
    6. Files, Rebecca, 2012. "SEC enforcement: Does forthright disclosure and cooperation really matter?," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 353-374.
    7. Zhu, Qi & Jin, Sisi & Huang, Yuxuan & Yan, Cheng, 2022. "Oil price uncertainty and stock price informativeness: Evidence from listed U.S. companies," Energy Economics, Elsevier, vol. 113(C).
    8. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    9. Jackson, Howell E. & Roe, Mark J., 2009. "Public and private enforcement of securities laws: Resource-based evidence," Journal of Financial Economics, Elsevier, vol. 93(2), pages 207-238, August.
    10. Thorsten Beck & Ross Levine & Alexey Levkov, 2010. "Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States," Journal of Finance, American Finance Association, vol. 65(5), pages 1637-1667, October.
    11. Thierry Foucault & Laurent Frésard, 2012. "Cross-Listing, Investment Sensitivity to Stock Price, and the Learning Hypothesis," The Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3305-3350.
    12. Chen, Ruiyuan & El Ghoul, Sadok & Guedhami, Omrane & Wang, He, 2017. "Do state and foreign ownership affect investment efficiency? Evidence from privatizations," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 408-421.
    13. Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    14. Xue Xia & Fei Teng & Liping Xu & Yu Xin, 2024. "CSRC’s random inspection and capital market information efficiency: an empirical evidence from stock price synchronicity," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 12(1), pages 199-222, January.
    15. Wang, Fangjun & Xu, Luying & Zhang, Junrui & Shu, Wei, 2018. "Political connections, internal control and firm value: Evidence from China's anti-corruption campaign," Journal of Business Research, Elsevier, vol. 86(C), pages 53-67.
    16. Roger Silvers, 2016. "The Valuation Impact of SEC Enforcement Actions on Nontarget Foreign Firms," Journal of Accounting Research, Wiley Blackwell, vol. 54(1), pages 187-234, March.
    17. Easley, David & Hvidkjaer, Soeren & O’Hara, Maureen, 2010. "Factoring Information into Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(2), pages 293-309, April.
    18. Jiang, Li & Kim, Jeong-Bon & Pang, Lei, 2011. "Control-ownership wedge and investment sensitivity to stock price," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2856-2867, November.
    19. Itay Goldstein & Alexander Guembel, 2008. "Manipulation and the Allocational Role of Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(1), pages 133-164.
    20. Xu, Jing & Pan, Zheyao & Tian, Gary (Gang), 2023. "Does the threat of enforcement of financial regulations affect the cost of equity in weak institutional environments?," The British Accounting Review, Elsevier, vol. 55(6).
    21. Huili Chen & Ying Chen & Bin Lin & Yanchao Wang, 2019. "Can short selling improve internal control? An empirical study based on the difference‐in‐differences model," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(5), pages 1233-1259, March.
    22. Bennett, Benjamin & Stulz, René & Wang, Zexi, 2020. "Does the stock market make firms more productive?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 281-306.
    23. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 525-622, May.
    24. Kong, Dongmin & Liu, Chenhao & Ye, Wenxu, 2023. "Randomized inspection and firm's government subsidies: A natural experiment in China," China Economic Review, Elsevier, vol. 82(C).
    25. R. David Mclean & Tianyu Zhang & Mengxin Zhao, 2012. "Why Does the Law Matter? Investor Protection and Its Effects on Investment, Finance, and Growth," Journal of Finance, American Finance Association, vol. 67(1), pages 313-350, February.
    26. Guoqing Zhang & Sicen Chen & Pengdong Zhang & Xiaowei Lin, 2022. "Does the random inspection reduce audit opinion shopping?," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 10(4), pages 528-548, October.
    27. Edmans, Alex & Jayaraman, Sudarshan & Schneemeier, Jan, 2017. "The source of information in prices and investment-price sensitivity," Journal of Financial Economics, Elsevier, vol. 126(1), pages 74-96.
    28. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    29. Shane Heitzman & Mengjie Huang, 2019. "Internal Information Quality and the Sensitivity of Investment to Market Prices and Accounting Profits†," Contemporary Accounting Research, John Wiley & Sons, vol. 36(3), pages 1699-1723, September.
    30. Shen, Jianghua & Xie, Lingmin, 2023. "Managerial ability and investment to price sensitivity," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 928-941.
    31. Yunsen Chen & Yilu Deng & Yufang Jin & Hetong Lou & Xin Zhang, 2020. "Political Connection and Regulatory Scrutiny through Comment Letters: Evidence from China," International Review of Finance, International Review of Finance Ltd., vol. 20(3), pages 789-798, September.
    32. Zhu, Qi & Jin, Sisi & Huang, Yuxuan & Yan, Cheng & Chen, Chuanglian, 2022. "Oil price uncertainty and stock price informativeness: Evidence from investment-price sensitivity in China," International Review of Financial Analysis, Elsevier, vol. 84(C).
    33. Farooq, Omar & Amin, Ayah, 2017. "National culture, information environment, and sensitivity of investment to stock prices: Evidence from emerging markets," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 41-46.
    34. James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, February.
    35. Doruk Cengiz & Arindrajit Dube & Attila Lindner & Ben Zipperer, 2019. "The Effect of Minimum Wages on Low-Wage Jobs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(3), pages 1405-1454.
    36. Zhao, Jing & Huang, Jingchang & Dou, Huan, 2023. "Internet searching and investment sensitivity to stock price: Evidence from a quasi-natural experiment," Finance Research Letters, Elsevier, vol. 51(C).
    37. Dasilas, Apostolos, 2022. "The impact of margin trading and short selling on the investment-to-price sensitivity. Evidence from China," International Review of Financial Analysis, Elsevier, vol. 84(C).
    38. Chen, Hui & Zhuang, Wanting & Wang, Zijia & Zhou, Anzhe, 2024. "Administrative audit regulation and the quality of accounting information: Evidence from China securities regulatory commission’s random inspection system," Research in International Business and Finance, Elsevier, vol. 71(C).
    39. Changchun Tan & Leixin Liu & Huaqing Wu & Peng Zhou, 2024. "The real effect of CSRC's random inspections on corporate financial fraud," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(S1), pages 5009-5038, December.
    40. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    41. Jeon, Heung-Jae & Jung, Sumi, 2024. "Generalist vs. Specialist CEOs: R&D Investment Sensitivity to Stock Price," Finance Research Letters, Elsevier, vol. 62(PA).
    42. K. Stephen Haggard & Xiumin Martin & Raynolde Pereira, 2008. "Does Voluntary Disclosure Improve Stock Price Informativeness?," Financial Management, Financial Management Association International, vol. 37(4), pages 747-768, December.
    43. J�rgen Ernstberger & Michael Stich & Oliver Vogler, 2012. "Economic Consequences of Accounting Enforcement Reforms: The Case of Germany," European Accounting Review, Taylor & Francis Journals, vol. 21(2), pages 217-251, August.
    44. Yang, Xingquan & Zhao, Rui & Yang, Zheng, 2024. "Preventive regulation and corporate financialization: Evidence from China Securities Regulatory Commission's random inspections," International Review of Financial Analysis, Elsevier, vol. 91(C).
    45. Christensen, Hans B. & Liu, Lisa Yao & Maffett, Mark, 2020. "Proactive financial reporting enforcement and shareholder wealth," Journal of Accounting and Economics, Elsevier, vol. 69(2).
    46. David Easley & Marcos M. López de Prado & Maureen O'Hara, 2012. "Flow Toxicity and Liquidity in a High-frequency World," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1457-1493.
    47. Driss, Hamdi, 2023. "Board Governance and Investment Sensitivity to Stock Price: International Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(7), pages 3027-3057, November.
    48. Jong‐Hag Choi & Sunhwa Choi & Linda A. Myers & David Ziebart, 2019. "Financial Statement Comparability and the Informativeness of Stock Prices About Future Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 36(1), pages 389-417, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lee, Eugenia Y. & Ha, Wonsuk & Park, Sunyoung, 2023. "Auditor specialization in R&D and clients’ R&D investment-q sensitivity," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(2).
    2. Hu, Yi & Jin, Shuchang & Xiong, Zhitao, 2025. "Regulator as a minority shareholder: How does public-plus-private enforcement affect investment-to-price sensitivity?," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 1790-1815.
    3. Li, Zhisheng & Liu, Chun & Ni, Xiaoran & Pang, Jiaren, 2024. "Stock market liberalization and corporate investment revisited: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 158(C).
    4. Jeon, Heung-Jae, 2023. "CEO overconfidence: A dual-detriment to investment-price sensitivity via market negligence and reduced informed trading," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    5. Sani, Jalal & Shroff, Nemit & White, Hal, 2023. "Spillover effects of mandatory portfolio disclosures on corporate investment," Journal of Accounting and Economics, Elsevier, vol. 76(2).
    6. Attig, Najah & El Ghoul, Sadok, 2021. "Flying under the radar: The real effects of anonymous trading," Journal of Corporate Finance, Elsevier, vol. 71(C).
    7. Zhang, Qiyu & Ding, Rong & Chen, Ding & Zhang, Xiaoxiang, 2023. "The effects of mandatory ESG disclosure on price discovery efficiency around the world," International Review of Financial Analysis, Elsevier, vol. 89(C).
    8. Itay Goldstein & Shijie Yang & Luo Zuo, 2020. "The Real Effects of Modern Information Technologies: Evidence from the EDGAR Implementation," NBER Working Papers 27529, National Bureau of Economic Research, Inc.
    9. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    10. Abou Tanos, Barbara & Farooq, Omar & Ahmed, Neveen, 2024. "Secrecy culture and sensitivity of investment to stock prices: Evidence from emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 96(C).
    11. Jin, Ling & Li, Zhisheng & Lu, Lei & Ni, Xiaoran, 2023. "Does stock market rescue affect investment efficiency in the real sector?," Journal of Financial Markets, Elsevier, vol. 65(C).
    12. Xu, Zhiwei & Liu, Xuan & Zhang, Teng & Ren, Pengyue, 2024. "Do corporate managers glean information from their stock prices? New evidence from China's strategic emerging industries," Economic Modelling, Elsevier, vol. 141(C).
    13. Chen, Zhihong & Huang, Yuan & Kusnadi, Yuanto & John Wei, K.C., 2017. "The real effect of the initial enforcement of insider trading laws," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 687-709.
    14. Pereira da Silva, Paulo, 2021. "Do managers pay attention to the market? A review of the relationship between stock price informativeness and investment," Journal of Multinational Financial Management, Elsevier, vol. 59(C).
    15. Lin, Ling & Xiao, Min & Yao, Rongrong & Zhang, Xiaoying, 2024. "Product market liberalization and corporate cash holdings: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    16. O'Toole, Conor M. & Morgenroth, Edgar L.W. & Ha, Thuy T., 2016. "Investment efficiency, state-owned enterprises and privatisation: Evidence from Viet Nam in Transition," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 93-108.
    17. Guo, Shijun & Hu, Fang, 2025. "Catalyzing transparency: Proactive enforcement of information disclosure and its impact on stock price synchronicity," Journal of Contemporary Accounting and Economics, Elsevier, vol. 21(1).
    18. Clarkson, Peter & Gao, Ru & Herbohn, Kathleen, 2020. "The relationship between a firm’s information environment and its cash holding decision," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(2).
    19. Cheung, William Ming Yan & Im, Hyun Joong & Selvam, Srinivasan, 2023. "Stock liquidity and investment efficiency: Evidence from the split-share structure reform in China," Emerging Markets Review, Elsevier, vol. 56(C).
    20. Xu, Jing & Pan, Zheyao & Tian, Gary (Gang), 2023. "Does the threat of enforcement of financial regulations affect the cost of equity in weak institutional environments?," The British Accounting Review, Elsevier, vol. 55(6).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:74:y:2025:i:c:s1544612324017537. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.