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Government Control, Regulatory Enforcement Actions, and the Cost of Equity

Author

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  • Kun Tracy Wang
  • Yanjun Liu
  • Wanbin Walter Wang

Abstract

Using a comprehensive manually collected dataset of regulatory enforcement actions against fraud in the Chinese capital market and a difference-in-differences (DID) research design, we examine the impact of such actions on the implied cost of equity and the role of the government as the controlling shareholder in moderating this relationship. We find that regulatory enforcement actions increase firms’ cost of equity, and that government controlling shareholders can mitigate the effect of these actions. Our results are robust to various sensitivity tests, including alternative measures of the cost of equity, alternative samples, additional control variables, and an alternative DID design. Additional analysis provides supporting evidence that the effect of enforcement actions on the cost of equity arises from investors’ perception of higher long-run information risk in the case of fraud firms. Further, government controlling shareholders can mitigate the impact of such actions on the cost of equity by lowering investors’ perceived information risk.

Suggested Citation

  • Kun Tracy Wang & Yanjun Liu & Wanbin Walter Wang, 2022. "Government Control, Regulatory Enforcement Actions, and the Cost of Equity," European Accounting Review, Taylor & Francis Journals, vol. 31(2), pages 449-493, March.
    • Handle: RePEc:taf:euract:v:31:y:2022:i:2:p:449-493
    DOI: 10.1080/09638180.2020.1822196
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    Citations

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    Cited by:

    1. Zhu, Nathan Zhenghang & Wang, Kun Tracy, 2025. "The impact of loosening regulatory requirements on firm innovation: Evidence from SEC rule 12h-6," The British Accounting Review, Elsevier, vol. 57(3).
    2. Xuanyi Chen & Qiliang Liu & Li Tian & Junbo Wang & Jian Xie, 2024. "Time distance and mutual fund holding horizon: Evidence from a quasi‐natural experiment setting of high‐speed railway opening," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(4), pages 4277-4312, December.
    3. Kun Tracy Wang & Greg Shailer, 2018. "Does Ownership Identity Matter? A Meta‐analysis of Research on Firm Financial Performance in Relation to Government versus Private Ownership," Abacus, Accounting Foundation, University of Sydney, vol. 54(1), pages 1-35, March.
    4. Xinyue Zhang & Yuan George Shan & Yuming Zhang & Chao Xing, 2025. "Does ESG rating divergence affect the cost of corporate debt?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 65(3), pages 2244-2280, September.
    5. Zhukun Lou & Mingran Li & Yuan George Shan & Ailin Ye, 2024. "Does corporate digitalisation moderate real earnings management?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(4), pages 4157-4196, December.
    6. Kun Tracy Wang & Nathan Zhenghang Zhu & Guqiang Luo, 2024. "Does News Media Affect Firm Innovation in Emerging Markets? Evidence from China," Abacus, Accounting Foundation, University of Sydney, vol. 60(4), pages 709-751, December.
    7. Tian, Gary & Wang, Kun Tracy & Wu, Yue, 2025. "Does the market value the green credit performance of banks? Evidence from bank loan announcements," The British Accounting Review, Elsevier, vol. 57(5).
    8. Simeng Liu & Kun Tracy Wang & Yue Wu, 2024. "Corporate Governance Reforms and Analyst Forecasts: International Evidence," Abacus, Accounting Foundation, University of Sydney, vol. 60(2), pages 272-304, June.
    9. Neukirchen, Daniel & Köchling, Gerrit & Posch, Peter N., 2025. "Institutional distraction and illegal business practices: The role of career concerns and wealth incentives," Journal of Financial Stability, Elsevier, vol. 80(C).
    10. Chen, Yunsen & Feng, Zizhen & Yu, Yao & Yuan, Wei, 2025. "The capital market consequences of the regulator-led minority shareholder: Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 21(3).
    11. 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).
    12. Wang, Yang & Ashton, John K. & Jaafar, Aziz, 2023. "Financial statement fraud, recidivism and punishment," Emerging Markets Review, Elsevier, vol. 56(C).
    13. Kun Tracy Wang & Lin Cui & Nathan Zhenghang Zhu & Aonan Sun, 2025. "Board Gender Diversity Reforms Around the World: The Impact on Corporate Innovation," Organization Science, INFORMS, vol. 36(4), pages 1416-1437, July.
    14. Kun Tracy Wang & Simeng Liu & Guqiang Luo, 2025. "Analyst Coverage and Corporate Innovation: Evidence from Exogenous Changes in Analyst Coverage," Abacus, Accounting Foundation, University of Sydney, vol. 61(3), pages 657-710, September.

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