Effectiveness of Regulatory Intervention

This research originated from the relatively common principal–agent conflicts among listed companies in Asian economies such as China, Hong Kong, Japan, South Korea, Malaysia, Singapore, and Thailand. According to Claessens, Djankov, and Lang (2000) and Chen, Firth, Gao, and Rui (2005), these conflicts are partly due to the prevalence of family ownership where the controlling families have strong incentives to extract private benefits at the expense of minority shareholders (Yeungand Huang 2012).

In the midst of this environment, regulatory enforcement has been proposed (Black 2001) as an effective means to protect investors from expropriation activities. It is intuitive that punishing offenders with adequate penalties would send warning signals to would-be offenders that they are being monitored constantly. In the case of milder offenses, however, lawsuits and fines may be too harsh and inappropriate whereas private warnings are too light (Ho, Lee, and Mak 2014) and do not send any warning signal to the marketplace.

This is where the unusual market activity (UMA) query mechanism fits in. First, it highlights suspicious activities, through direct disclosure to the public, that the regulator deems not severe enough to warrant a formal investigation. Second, the UMA query mechanism serves as a platform for listed companies to account for abnormal market pricing and/or volume movement, which is akin to giving listed companies a second chance to come clean with any undisclosed material information or to reaffirm their original status of unawareness. Third, similar to lawsuits and fines, a UMA query sends warning signals to would-be offenders that regulators are closely monitoring their activities.

Upon receiving a UMA query, listed companies respond in one of four different “styles”:

1. Reply “aware” and disclose material information on the day of the query. We labeled these companies “affirmative respondents” (AR) and grouped them under Disclosure Style Category 1.
2. Reply “unaware” but release material information within the next seven trading days. We labeled these companies “deferred respondents” (DefRes) and grouped them under Disclosure Style Category 2.
3. Reply “unaware” but release material information on the day of the query. We labeled these companies “delayed respondents” (DelRes) and grouped them under Disclosure Style Category 3.
4. Reply “unaware” with no follow-up disclosure of material information. We labeled these companies “negative respondents” (NR) and grouped them under Disclosure Style Category 4.