Regulator as a minority shareholder: How does public-plus-private enforcement affect investment-to-price sensitivity?

In February 2016, the China Securities Regulatory Commission (CSRC) launched a pilot program for investor protection, allowing the China Securities Investor Service Center (CSISC), an affiliate of the CSRC, to hold 100 shares of listed companies in the pilot regions. This pilot program combines public and private enforcement by allowing a regulatory agency to participate in corporate governance as a minority shareholder. Leveraging the enforcement of the CSISC shareholding program, we investigate the influence of the public-plus-private enforcement on investment-to-price sensitivity. We find that the CSISC shareholding program significantly increases the investment-to-price sensitivity of pilot firms. We further show that the CSISC shareholding program facilitates managerial learning from stock prices by improving corporate governance and increasing the amount of private information in stock prices. In addition, we find that the impact of the CSISC shareholding program, as a form of public-plus-private enforcement, is unlikely to be distorted by political connections and is also unlikely to crowd out the oversight from minority shareholders. We provide direct evidence on the enforcement theory of regulation and expand the economic consequence of the CSISC shareholding program from the perspective of investment-to-price sensitivity.