Research On The Effect Of Penalty Of Listed Companies For Financial Irregularities

The supervision of law enforcement is the cornerstone of the healthy development of the capital market. Enhancing the accounting supervision is not only the urgent requirement of regulating the financial behaviors and financial fraud of the enterprises, but also an effective means of maintaining an open, fair, just market order and the legitimate rights of the investors. The phenomenon of financial fraud is becoming increasingly fierce and faking methods also become more and more hidden and complex. As a result, a large number of illegal cases lead to serious distortion of financial information and the allocation of resources, which greatly hurt investors’ confidence. In consideration of these obvious trends, CSRC shift the focus of regulatory to section of the inspection and law enforcement in 2012.However, the deeper problems such as appropriateness of the regulatory system and the effect of regulation have not been given due attention along with the severity of financial frauds in China. So it is significant to study the effect of penalty of listed companies for financial irregularities.This paper takes the corporations that were punished by Chinese regulators for their financial irregularities as subjects to study the effect of penalty through the timeliness and deterrent force of the punishment and the market reaction of the punishment announcement, and further to evaluate the effectiveness of supervision of our government. Firstly, we describe the financial irregularities and the overall situation of punishment on listed Corporations with statistical analysis method. Furthermore we combine with cases of violation to probe into the problems of timeliness and the deterrent force of the punishment. Then, we use the event study method to analyze fluctuation range of average abnormal return and cumulative abnormal return in a short time window around punishment announcement to test the overall effect of the notices of penalty. Furthermore, we analyze the different effects of punishment in terms of punishment subject, punished object, punishment dynamics and timeliness of punishment. On the results of the different reaction of investors, we further study the market reaction of Investigation announcement of regulator before formal penalty and compare the market reaction between the Investigation announcement and the formal punishment announcement. In addition, we test the investors’ sensibility of the contents from the announcement in order to help the investors to perceive the underlying risk factors and evaluate the effectiveness of supervision of our government. Finally, we point out the existing problems in our securities supervision mechanism and provide a reference for improving the effect and efficiency of supervision.This study finds that:(1) The regulatory enforcement procedure of our country is too complicated. The efficiency and deterrent is low and has time-lag effect.(2) The penalty notices have negative information content significantly. They arouse a negative market effect such as share prices fall and abnormal return, cumulative abnormal returns become significantly negative during a short time window around the announcement day, especially on the announcement day.(3) The investors are not sensitive to the regulatory agency level. Although the market reaction to the punishment of stock exchange is stronger than the punishment from CSRC, the difference is not significant.(4) The investigation notice of CSRC has obviously negative information content. During the window [-1,3], the rare of cumulative abnormal returns achieve-7.44%. Compared with the formal punishment of CSRC, it leads to a stronger response.(5)The public condemnation arouses the strongest reaction. The response of warning along with fine is secondly strongest. And public criticism, simply warning, merely fine only result in lukewarm reaction.(6)The response of punishment that toward the listed companies and senior executives or merely the listed companies is more obvious than simply the senior executives.(7)The sooner the penalty is made, the more intense market reaction will be. However, whether the interval between investigation notice and punishment announcement is shorter than 2 years, the difference of market reaction is not significant.