A Study On The Role Of Reputation Mechanism In China 's Stock Market

As one of the informal institutional arrangements, reputation mechanism is very important to support the preface proceeding of the market. Its significant role in mature stock markets has been proved, while there are only few studies focusing on its function in transition economy stock markets. Since its establishment in1990s, China stock market has passed through more than20years. Whether the reputation mechanism functioned well during the process? And what factors will influence the effect of reputation mechanism? This paper will mainly discuss these issues. If the reputation mechanism did play an important role in China stock market, when reputation damage occurs, the listed company will see an apparent decline of its stock prices. In other words, when listed company receives formal punishments for illegal activities, it will underperform in stock market and loss its market value. And the stronger reputation mechanism functions, the greater reputation losses will be.Beginning by summarizing and coordinating current studies, this paper set up a model based on Bayes Decision to illustrate how environmental factors affect the reputation mechanism. This paper then selected104listed companies which were punished by China Regulatory Commission between2004and2012as study samples. We employ event study and econometric approach to empirically study the reputation mechanism in China stock market. Main conclusions go as follows:Firstly, the reputation mechanism functions well in China stock markets. Secondly, there is a significant positive relationship between reputation loss and government regulation. And the information system efficiency is critical to the effect of reputation mechanism. Therefore, to promote reputation mechanism, we could consider measures such as improving the government regulation and optimizing the corporate governance.