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Comply-or-explain regulation and investor protection

Author

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  • Bourveau, Thomas
  • Gao, Xingchao
  • Li, Rongchen
  • Zhou, Frank S.

Abstract

We investigate a 2012 comply-or-explain regulation implemented by China’s Shanghai Stock Exchange. The regulation requires eligible firms to pay 30% of their current-year profits as cash dividends or explain the reasons why they do not meet this requirement through a public conference call. Using firms listed on the Shenzhen Stock Exchange as a control group, our difference-in-differences estimates suggest that firms subject to the regulation decreased tunneling, irrespective of whether they complied by paying or disclosing. Further analyses suggest that the reduction in tunneling is partially attributed to enhanced regulatory monitoring over explaining firms and the constraint on excess cash of paying firms. These findings offer novel policy insights into how a flexible comply-or-explain form of regulation can mitigate agency costs between controlling and minority shareholders in a weak institutional environment.

Suggested Citation

  • Bourveau, Thomas & Gao, Xingchao & Li, Rongchen & Zhou, Frank S., 2025. "Comply-or-explain regulation and investor protection," Journal of Accounting and Economics, Elsevier, vol. 79(2).
    • Handle: RePEc:eee:jaecon:v:79:y:2025:i:2:s0165410125000011
    DOI: 10.1016/j.jacceco.2025.101765
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    More about this item

    Keywords

    Comply or explain; Investor protection; Payout policy; Disclosure regulation; Corporate governance;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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