Does regulation of defensive tactics with mandatory rules benefit shareholders? Evidence from event studies in China

Scholars have long debated whether defensive tactics increase or reduce firm value and how to regulate them. This article conducts event studies to examine the impacts of the regulation of a common defensive tactic in China that requires shareholders to hold shares for a certain period before they can nominate directors (“the holding-period requirement”). The Chinese Securities Investors Service Center (CSISC), which is a quasi-government organization under the charge of the Chinese Securities Regulatory Commission, initiated regulatory actions against this type of defensive tactic claiming that it violates mandatory rules in Chinese corporate law, which caused on average a -0.31% abnormal return to stocks of over two hundred corporations that had adopted similar tactics. The impact of the first event on the sample stocks was statistically significant, suggesting that the defensive tactics were beneficial to firm value and the regulatory decisions had negative impacts on firm value. Corporations with similar defensive tactics also experienced a -0.25% abnormal return on average after the court ruled that this type of defensive tactic violated Chinese corporate law. Evidence suggests that the events had a larger impact on corporations with dispersed ownership structures and small market capitalization. These results suggest that employing mandatory rules to regulate the holding-period requirements in China is likely to harm shareholders’ interests.