Accounting-Based Regulation and Protection of Minority Shareholders

• Main Authors: WANG, Jiwei, CHEN, Kevin
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2005
• Subjects: Accounting; Business Law, Public Responsibility, and Ethics; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/77
• Institution: Singapore Management University

This paper examines the impact of a seasonal equity offering (SEO) regulation based on accounting profitability numbers (accounting-based regulation hereafter) on the stock market in China. Although positive accounting theory predicts that regulations based on accounting numbers could induce entrants’ incentive to opportunistically manipulate these accounting numbers, we find that the accounting-based regulation in China could protect minority shareholders. Specifically, Chinese market generally positively reacts to announcement of the accounting-based regulation. In addition, we find that investors react less negatively to SEO proposal announcements made by Chinese listed companies when there is an accounting-based regulation than when absent. The beneficial effect of accounting-based regulation in China may due to the prevalence of controlled companies and the weakness of other institutional, market, cultural, and legal constraints.