Summary:
Investor protection is an essential requirement for the sustained and healthy development of capital markets. The construction of legal systems is crucial for investor rights, decision-making power, and oversight, forming the foundation for safeguarding investor interests. When legal frameworks are incomplete, companies may neglect precautions against misconduct, potentially engaging in speculative behavior and evading responsibility. Simultaneously, regulatory authorities face challenges in enforcement, and corruption may thrive. In the absence of strong legal constraints on corporate behavior, investors are susceptible to information concealment or manipulation, leading to erroneous decision-making and a lack of protection for investor interests. Abnormal stock price fluctuations represent a significant avenue through which investors' interests are compromised in capital markets. Research has indicated that companies employ tactics such as earnings management and selective information disclosure to conceal adverse news, releasing accumulated hidden information to the market, resulting in stock price crashes. Companies with poor transparency face more severe risks of stock price crashes. The literature has predominantly analyzed ways to reduce abnormal stock price fluctuations and crash risks from a micro-perspective. However, the integrity of macro-legal systems also plays a crucial role in influencing stock price volatility and investor protection. Inadequate legislation provides opportunities for corporate concealment. When legal systems are imperfect, companies may sacrifice long-term interests for short-term gains, laying the groundwork for subsequent operational and sudden stock price risks. Using a sample of Chinese A-share listed firms, this paper takes the implementation of China's Environmental Protection Law in 2015 and the enactment or revision of local environmental protection laws and regulations from 2005 to 2016 as natural experiments and examines the impact of environmental legislation on the protection of investors' interests and the corresponding mechanisms from the perspective of abnormal fluctuations in the capital market. We find that environmental legislation significantly increases the behavioral constraints of heavily polluting firms, compared with non-heavily polluting firms, and reduces the risk of a stock price crash. The channels of this effect involve environmental legislation inducing heavily polluting firms to increase investment in environmental protection and improve the quality of their environmental information disclosure. Moreover, after the introduction of environmental legislation, the risk of a stock price crash is more pronounced for heavy polluting enterprises with more environmental protection investment and higher-quality environmental information disclosure. In addition, we find that polluting companies audited by high-quality auditors or tracked by analysts show a more significant reduction in stock price crash risks after the implementation of environmental legislation, indicating a complementary relationship between external supervision and environmental legislation. The contributions of this paper are threefold. First, utilizing a natural experiment of environmental legislation, the study reveals the impact of a robust legal system on investor protection in capital markets. Previous research on investor protection has mainly focused on the role of corporate governance, with conclusions about the impact of legal regulations often derived from cross-national and cross-regional comparisons. This study finds that the strengthening of environmental legislation increases constraints on the behavior of polluting companies, reduces their operational risks, lowers the risk of abnormal stock price fluctuations, and safeguards the interests of stock market investors. Second, by using abnormal capital market fluctuations as a starting point, this paper further elucidates the economic consequences of strengthened environmental regulations. The results suggest that the impact of environmental legislation on company value does not simply correspond to changes in stock prices after the introduction of these laws but is primarily reflected in a reduced likelihood of abnormal stock price fluctuations. Third, the paper provides a new perspective on crash risks in the Chinese capital market. Previous research on crash risks has largely focused on micro-level triggering mechanisms, such as information transparency, corporate governance mechanisms, and insider trading. This paper reveals the influence of macro-factors, such as legal systems, on abnormal capital market fluctuations.
高明, 毕燕璐, 胡聪慧. 环境立法与投资者利益保护——基于股票市场异常波动的视角[J]. 金融研究, 2024, 523(1): 113-130.
GAO Ming, BI Yanlu, HU Conghui. Environmental Laws and Investor Protection: A Perspective from Abnormal Fluctuation of the Stock market. Journal of Financial Research, 2024, 523(1): 113-130.
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