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Reforming private securities litigation in China: The stock market has already cast its vote

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  • Xu, Wenming

Abstract

This paper employs a natural experiment research design to analyze the differences in the effects of the 2002 notice concerning private securities litigation issued by the Supreme People's Court on stock price performance in A/B-share markets. Using a sample of 162 twin A/B-shares issued by 81 listed firms, we find that the portfolio of B-shares, which are treated and held in large volumes, obtains a significant positive treatment effect of 2.08% relative to that of A-shares over a 3-day event window. The treatment effect indicates that the collective action problem undermines the compensatory function of the private enforcement system, which is the primary goal it was designed to achieve. In addition, we look into the determinants of the abnormal return between A/B-shares issued by the same firm and find that the efficiency of the regional court system is positively correlated with the magnitude of the abnormal return. Rational investors expect that the compensation from private litigation is determined by the costs of using the judiciary system.

Suggested Citation

  • Xu, Wenming, 2016. "Reforming private securities litigation in China: The stock market has already cast its vote," International Review of Law and Economics, Elsevier, vol. 45(C), pages 23-32.
    • Handle: RePEc:eee:irlaec:v:45:y:2016:i:c:p:23-32
    DOI: 10.1016/j.irle.2015.11.002
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    Cited by:

    1. Liu, Yan, 2023. "Essays on credit rating agencies in China," Other publications TiSEM b54b3315-1185-48b8-aaf8-8, Tilburg University, School of Economics and Management.
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    3. Zeng, James Si, 2021. "Does regulation of defensive tactics with mandatory rules benefit shareholders? Evidence from event studies in China," International Review of Law and Economics, Elsevier, vol. 66(C).
    4. Xu, Wenming & Xu, Guangdong, 2020. "Understanding public enforcement of securities law in China: An empirical analysis of the enforcement actions of the CSRC and its regional offices against informational misconduct," International Review of Law and Economics, Elsevier, vol. 61(C).

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    More about this item

    Keywords

    A/B-share markets; Enforcement; Event study; Private securities litigation; Treatment effects;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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