|Abstract as per original application
This proposed project aims to study the use of “soft regulation” employed by regulators and stock exchanges in China to curb wrongdoings by corporations. Soft regulatory measures are not legally binding and not compulsory. They rely on persuasion rather than legal sanctions as enforcement strategies. An important soft regulatory measure used in corporate governance in China is the letter of enquiry (LoE). In 2014, the two stock exchanges in China started to employ LoEs to address many decisions made by listed corporations, including distribution of dividends, issuance of new shares, executive compensation, related-party transactions and adoption of takeover defenses. These LoEs merely pose questions to listed corporations on whether their decisions promote shareholder welfare. Apart from the LoEs, regulators often use “interviews” or “informal conversations” to regulate the conduct of listed corporations. Current studies have neither provided an adequate explanation for the development of LoEs nor a sufficient evaluation of the strengths and weaknesses of this regulatory approach in developing countries such as China.
The objective of the first part of this project is to present the basic facts of the use of soft regulation in corporate governance and the responses by corporations in order to provide an overview of the practice of this regulatory method in China and to evaluate whether this regulatory technique is effective overall.
The major question in the second part is why soft regulation is effective or ineffective and how it affects the decisions made by corporations. The LoEs may be effective because they impose pressure on corporations by affecting the prices of their stocks. Corporations may also comply with the soft regulation because they believe it is the right thing to do. This part will collect evidence to examine different mechanisms through which these measures affects corporate decisions.
The third part aims to evaluate the importance of soft regulation in the context of China’s special institutional and market environment. A comparative study will be conducted to examine the differences in the scopes and effects of soft regulation between China and certain developed countries and to identify the major factors that may explain these differences, including legal origin, the capacity of court and legislature, and the ownership structure of corporations in these different countries.
Based on the above empirical and theoretical analysis, the final part will provide normative implications on how China may better improve the current regime and promote corporate governance in China.