Can strict regulation lead to low risk premium? The impact of securities regulatory enforcement intensity on the cost of equity capital

In recent years, regulatory frameworks in China’s capital markets have undergone significant changes, with a growing focus on improving market transparency and enforcing regulatory standards. As the Chinese securities market continues to expand, understanding the role of regulatory enforcement in shaping firm behavior becomes increasingly important. This study uses panel data from Chinese A-share listed companies and city-level datasets from 2003 to 2023 to examine how securities regulatory enforcement intensity affects firm cost of equity capital (CEC). The results show a significant negative relationship between regulatory enforcement intensity and the CEC. Information transparency is found to play a significant mediating role in this relationship. Heterogeneity analysis indicates that the effect of regulatory enforcement intensity on the CEC differs between firms located in southern and nonsouthern regions. In addition, the implementation of the new Securities Law significantly reduces firm CEC. Based on these findings, the study offers policy recommendations, including enhancing regulatory transparency, improving information disclosure mechanisms, balancing the legal environment, and promoting regionally differentiated regulation to support the stable and healthy development of the capital market.