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Security regulations, access to capital markets, and firm performance: Evidence from China
Author(s) -
Wang Kun,
Wei Zhe,
Xiao Xing,
Sun Kunpeng
Publication year - 2020
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12432
Subject(s) - profitability index , business , china , equity (law) , monetary economics , finance , abnormal return , industrial organization , financial system , economics , political science , stock exchange , law
This study explores the cost of security regulations in China, where firms are required to meet a certain profitability benchmark before applying for permission to raise more equity via secondary equity offerings (SEOs). Using a difference‐in‐differences setting, we show that firms affected by the regulation (i.e., firms with high external financing demands (EFD) but profitability lower than the regulatory requirement) significantly underperform their counterparts, while unaffected firms do not. The affected firms’ performance decline increases (decreases) when the requirement of profitability is more (less) restricted. Consistently, the three‐day cumulative abnormal return (CAR) of firms with high EFD is significantly negative (positive) when the regulation is tightened (loosened). Our study provides evidence on how the cost of regulation affects companies that have growth opportunities.