Huang, Yixin (2023) Three Essays on Government Intervention in Financial Markets. École Doctorale Sciences de Gestion TSM (Toulouse).

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Abstract

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I investigate the impact of government intervention in financial markets through two key policies: the Random On-Site Inspection policy in 2016 and the Split Share Reform in 2005. Using the Random On-site Inspection policy, I demonstrate that higher detection probabilities stimulate trading of concealed information, specifically fraudulent behaviors in listed firms. In event studies, I observe that firms randomly selected for upcoming inspections experience a 2.3% decrease in CAR (cumulative abnormal returns) on the selection date for each additional sanction letter issued within the year following selection. Furthermore, I identify a notable trend where firms subject to random selection primarily undergo management team turnover instead of blockholder exits within one year of selection, a pattern consistent in both fraudulent and non-fraudulent firms. Fraudulent firms exhibit more substantial turnover, with an average increase of 0.04 members resigning. These findings are further supported by the correlation between individuals who sold their shares and those who subsequently faced sanctions in (Directors and Officers) D&O lawsuits. In contrast to Random Inspection, which is designed as a punitive measure, the Split share reform prioritizes requirement-setting by mandating nontradable shareholders to compensate tradable shareholders for liquidity rights. Conducting an event study on the date of firm's compensation plan announcement, I assess the market reactions while factoring in the market's learning process about compensation expectations. The results show a significant negative CAR. Importantly, I find that the compensation requirement encourages firms unable to meet the criteria initially to enhance their financial standing. Overall, my thesis emphasizes the pivotal role of government intervention in mitigating negative externalities in financial markets.