Reputational sanctions in China's securities market

Columbia Law Review

Volumn 108, Issue 4, 2008, Pages 929-983

  Liebman, Benjamin L ^a   Milhaupt, Curtis J ^a  

^a The Earth Institute at Columbia University

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[No Author keywords available]

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EID: 46149125534     PISSN: 00101958     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (244)

1. Rafael La Porta, Florencio Lopez-De-Silanes, Andrei Shleifer & Robert W. Vishny, Legal Determinants of External Finance, 52 J. Fin. 1131, 1149-50 (1997).
2. Id. at 1149.
3. See, e.g., Simon Johnson, Peter Boone, Alasdair Breach & Eric Friedman, Corporate Governance in the Asian Financial Crisis, 58 J. Fin. Econ. 141, 184-85 (2000) ("[O]ur results . . . suggest that the extent of exchange rate and stock market collapse in response to a loss of confidence is affected by investor protection."). There is a debate in the literature today about whether public or private enforcement of securities laws contributes to more dispersed share ownership, but commentators on both sides emphasize legal protections as central to stock market development.
4. See Rafael La Porta, Florencio Lopez-De-Silanes & Andrei Schleiver, What Works in Securities Laws?, 61 J. Fin. 1, 28 (2006) (arguing that results "point to the need for legal reform to support financial development, and cast doubt on the sufficiency of purely private solutions in bridging the gap between countries with strong and weak investor protection");
5. Howell E. Jackson & Mark J. Roe, Public Enforcement of Securities Laws: Preliminary Evidence 4 (Aug. 8, 2007) (unpublished manuscript, on file with the Columbia Law Review), available at http://ssrn.com/abstract= 1000086 (cautioning that "regression results linking private enforcement variables and corporate law quality variables . . . with favorable financial outcomes . . . [should not] lead policymakers to promote private enforcement rales and institutions to the detriment of public enforcement institutions").
6. See John C. Coffee, Jr., The Rise of Dispersed Ownership: The Roles of Law and the State in the Separation of Ownership and Control, 111 Yale L.J. 1, 34-39 (2001) ("[F]or a variety of path-dependent reasons, the NYSE organized itself as an exclusive, high-quality securities market that would list only securities that were suitable for the public investor . . . .").
7. E.g., Paul G. Mahoney, The Exchange as Regulator, 83 Va. L. Rev. 1453, 1455 (1997) ("[T]he benefits of regulatory competition would be most effectively achieved by devolving more regulatory authority to the bodies that were the first regulators - the securities exchanges themselves.");
8. see also A.C. Pritchard, Markets as Monitors: A Proposal to Replace Class Actions with Exchanges as Securities Fraud Enforcers, 85 Va. L. Rev. 925, 1020 (1999) ("An exchange-based antifraud regime harnesses the markets themselves as effective, low-cost monitors for fraud.").
9. Marcel Kahan, Some Problems with Stock Exchange-Based Securities Regulation, 83 Va. L. Rev. 1509, 1518 (1997).
10. See Katharina Pistor Sc Chenggang Xu, Governing Stock Markets in Transition Economies: Lessons from China, 7 Am. L. & Econ. Rev. 184, 185 (2005) ("China has only slowly developed a legal framework for stock markets and has a weak law enforcement record.").
11. See, e.g., Walter Hutchens, Private Securities Litigation in China: Material Disclosure About China's Legal System?, 24 U. Pa. J. Int'l Econ. L. 599 (2003).
12. We are aware of only one substantive paper in English that discusses the shaming sanctions. See Gongmeng Chen, Michael Firth, Daniel N. Gao & Oliver M. Rui, Is China's Securities Regulatory Agency a Toothless Tiger? Evidence from Enforcement Actions, 24 J. Acct. & Pub. Pol'y 451 (2005) [hereinafter Chen et al., Toothless Tiger]. The limited Chinese-language academic literature that mentions exchange sanctions likewise treats shaming sanctions largely in passing.
13. See, e.g., Dan M. Kahan & Eric A. Posner, Shaming White-Collar Criminals: A Proposal for Reform of the Federal Sentencing Guidelines, 42 J.L. & Econ. 365, 368-83 (1999) (weighing merits of shaming sanctions);
14. David A. Skeel, Jr., Shaming in Corporate Law, 149 U. Pa. L. Rev. 1811, 1823-34 (2001) (same).
15. The literature on norms and corporate law supports the conjecture that China provides fruitful ground for an inquiry of this sort. For example, Bernard Black has shown that the market rewards firms that signal willingness to abide by norms of good corporate governance in Russia, where law and governance standards are weak. Bernard Black, Does Corporate Governance Matter? A Crude Test Using Russian Data, 149 U. Pa. L. Rev. 2131, 2133 (2001) ("The correlation between . . . firms' value ratios and their corporate governance rankings . . . is striking.");
16. see also John C. Coffee, Jr., Do Norms Matter? A Cross-Country Evaluation, 149 U. Pa. L. Rev. 2151, 2175 (2001) (concluding that "norms may matter most when law is weakest").
17. Franklin Allen, Jun Qian & Meijun Qian, Law, Finance, and Economic Growth in China, 77 J. Fin. Econ. 57, 59 (2005) [hereinafter Allen et al., Economic Growth] (concluding that "alternative . . . corporate governance mechanisms, such as those based on reputation and relationships . . . support the growth of the Private Sector.").
18. See generally Alexander Dyck, Natalya Volchkova & Luigi Zingales, The Corporate Governance Role of the Media: Evidence from Russia (European Corp. Governance Inst., Working Paper No. 154/2007, 2006), available at http://ssrn.com/abstract=891206 (on file with the Columbia Law Review) [hereinafter Dyck et al., Russia] (analyzing media coverage of Russian corporate governance from 1999-2002);
19. Alexander Dyck & Luigi Zingales, The Corporate Governance Role of the Media (Ctr. for Research in Sec. Prices, Working Paper No. 543, 2002), available at http://ssrn.com/abstract=335602 (on file with the Columbia Law Review) [hereinafter Dyck & Zingales, Media] (discussing manner in which media pressures corporate managers toward socially acceptable practices).
20. See supra notes 1-5 and accompanying text.
21. Or at least what could reasonably pass as self-regulatory initiative under existing political and legal constraints.
22. The Shanghai Stock Exchange was established on November 26, 1990, and the Shenzhen Stock Exchange was established on December 1, 1990. See Shanghai Stock Exchange, Jiaoyisuo jieshao [Introduction to the Exchange], at http://www.sse.com.cn/sseportal/ps/zhs/sjs/jysjs.shtml (last visited Feb. 25, 2008) (on file with the Columbia Law Review) (describing history of Shanghai Stock Exchange);
23. Shenzhen Stock Exchange, Bensuo jianjie [Introduction to the Exchange], at http://www.szse.cn/main/aboutus/bsjs/bsjj (last visited Feb. 25, 2008) (on file with the Columbia Law Review) (describing history of Shenzhen Stock Exchange).
24. Kenneth W. Dam, The Law-Growth Nexus: The Rule of Law and Economic Development 260 (2006).
25. Stephen Green, The Development of China's Stock Market, 1984-2002: Equity Politics and Market Institutions 10-12 (2004).
26. Id. at 207.
27. Jinrong yanshengpin shichang tongyang xuyao jingzheng [The Market for Financial Derivative Products Also Needs Competition], Jinrong shibao [Financial News], Sept. 4, 2006, available at http://stock.jrj.com.cn/news/2006-09-04/ 000001616420.html (on file with the Columbia Law Review);
28. Wo Wei Yi Kuang, Shenzhen: ni bei shei paoqi? [Shenzhen: Who Dumped You?], People's Daily Online, Nov. 17, 2002, at http://www.people.com.cn/GB/ 32306/49291/5211136.html (on file with the Columbia Law Review);
29. posting of Jin Xinyi, Zhusanjiao shidiao jingzhengli le ma? [Has the Pearl River Delta Lost Its Competitiveness?], to http://bbs.southcn.com/forum/ index3.php?forumname=lingnanchaguan&job=view&topicid=39797# (July 28, 2003, 15:42 EST) (on file with the Columbia Law Review).
30. See Huang He, Chuangyeban, xiayibu [Start-up Board, the Next Step], Nanfang zhoumo [Southern Daily], June 1, 2006, available at http://www. nanfangdaily.com.cn/ZM/20060601/jj/cj/200606010043.asp (on file with the Columbia Law Review);
31. Zhong Lu, Chuangyeban hechu chuangye? Jinghushen zhankai zheng "ban" dazhan [Where Will the Start-Up Board Be Started? Beijing, Shanghai, and Shenzhen Begin the Battle for Obtaining the "Board"], Beijing qingnian bao [Beijing Youth Daily], Nov. 18, 2000, available at http://www.bjyouth.com.cn/Bqb/20001018/GB/4405D1018B1707.htm (on file with the Columbia Law Review).
32. Shenzhen also successfully resisted efforts to merge the two exchanges. Chen Hong, 1999 Yimao zhibian shenhu zhizheng (2) [A Heightened Battle Between the Shenzhen and Shanghai Stock Exchanges in 1999 (2)], at http://www.ynlib.cn/ whpd/ShowArticle.asp?ArticleID=25497 (last modified June 14, 2006) (on file with the Columbia Law Review);
33. Jiaoyisuo cong junheng fazhan zou xiang jingzheng [Stock Exchanges Go From Balanced Development to Competition], at http://www.shlottery.gov.cn/ epublish/gb/paper124/20001222/class012400011/hwz174787.htm (last visited Jan. 30, 2008) (on file with the Columbia Law Review).
34. In September 2000, the Shenzhen Stock Exchange suspended the listing of new A-shares in order to prepare for the establishment of the start-up board. See Duan Hongyan, Diwei xuerao, gongneng ruohua, zanting Shenjiaosuo xinggu shangshi dui Shenzhen zhengquan shichang yingxiang yanjiu [Position to Be Weakened, Functions to Be Reduced: Research Concerning the Impact on the Shenzhen Securities Market Caused by the Suspension of the Listing of New Shares on the Shenzhen Exchange], Zhongguo jingying bao [China Management Newspaper], Aug. 29, 2002, available at http://www.people.com.cn/GB/jinji/36/20020829/ 810945.html (on file with the Columbia Law Review). Such suspension did not end until May 2004, after the CSRC formally approved the creation of the Shenzhen Exchange's Small and Medium Enterprises Board.
35. See Zhongxiao qiye bankuai fazhan licheng [Timeline of the Development of the Small and Medium Enterprise Board], Sichuan xinwen wang - Chengdu shangbao [Sichuan News Web - Chengdu Business Newspaper], June 25, 2004, available at http://finance.sina.com.cn/roll/20040625/0624833315.shtml (on file with the Columbia Law Review).
36. Shenjiaosuo wuyue tuichu zhong xiao qiyeban yu Shenzhen zhuban shichang baochi juli [The Small and Medium Enterprises Board That the Shenzhen Stock Exchange Will Launch in May Will Maintain Separation from the Main Board], Zhonghua gongshang shibao [China Business Times], Mar. 30, 2004, available at http://business.sohu.com/2004/03/30/73/article219657350.shtml (on file with the Columbia Law Review). A 2006 report in the China Securities Journal stated that the standard for determining companies to be listed on the SMEB "is still awaiting clarification," and that the size of companies listing on the SMEB has been gradually increasing.
37. Zhou Dao, Zhonggong guoji shoufa guimo chuang zhongxiaoban gongsi jilu [The Size of CAMC's Initial Offering Is a Record for the Small and Medium Enterprises Board], Zhongguo zhengquan bao [China Securities Journal], May 30, 2006, available at http://finance.sina.com.en/stock/t/20060530/0539717153.shtml (on file with the Columbia Law Review). Some new listings in Shenzhen post-2004 have exceeded the size of certain listings in Shanghai during the same period. The general trend, however, is for smaller companies to list in Shenzhen and for larger companies to list in Shanghai.
38. For a current list of the companies listed in the Shenzhen Exchange, see Shenzhen Stock Exchange, Shangshi gongsi liebiao [Table of Listed Companies], at http://www.szse.cn/main/marketdata/jypz/colist/ (last visited Jan. 30, 2008) (on file with the Columbia Law Review).
39. For a current list of the companies listed on the Shanghai Exchange, see Shangshi gongsi [Listed Companies], at http://www.sse.com.cn/sseportal/webapp/ datapresent/SSEQueryStockInfoAct?reportName=BizCompStockInfoRpt&PRODUCTID= &PRODUCTJP=&PRODUCTNAME=&keyword=&tab_flg=&CURSOR=51 (last visited Jan. 30, 2008) (on file with the Columbia Law Review). Note that the number of Shanghai listed companies is A-Share listed companies only.
40. See Pistor & Xu, supra note 7, at 185 ("Standard measures for stock market performances suggest that China is performing better than most other transition economies . . . .").
41. It is worth noting that, as Table 1 indicates, China has far fewer listed companies (1440) than the major developed economies such as the U.S. (5433), or other large transition economies today, such as India (4796).
42. Price Waterhouse Coopers, Investment Management Perspectives 15 (July 2005), available at http://www.pwc.com/extweb/industry.nsf/docid/ 1282bde3dace909985256f870075d832/$File/july05perspectives.pdf (on file with the Columbia Law Review).
43. Allen et al., Economic Growth, supra note 12, at 73.
44. See Art Durnev, Kan Li, Randall Morck & Bernard Yeung, Capital Markets and Capital Allocation: Implications for Economies in Transition, 12 Econ. Transition 593, 595-96 (2004) (comparing U.S., "a more functionally efficient stock market," with China, "a more functionally inefficient" market where "functional efficiency" refers to ability of stock market to allocate capital to its highest value uses);
45. see also Merritt B. Fox, Art Durnev, Randall Morck & Bernard Yeung, Law, Share Price Accuracy, and Economic Performance: The New Evidence 29 fig.3 (Aug. 19, 2003) (unpublished manuscript, on file with the Columbia Law Review) (showing, from study of forty countries, China with second lowest level of share price accuracy).
46. See Durnev et al., supra note 29, at 623.
47. See Dongwei Su, Chinese Stock Markets: A Research Handbook 88 (2003) (suggesting inefficiency from variance ratio tests of Chinese market).
48. See, e.g., Zhiwu Chen, Capital Markets and Legal Development: The China Case, 14 China Econ. Rev. 451, 459 (2003) (noting widely known accounting fraud and market abuses).
49. Id. at 453.
50. Franklin Allen, Jun Qian & Meijun Qian, Comparing China's Financial System 5-6 (Sept. 30, 2002) (unpublished manuscript, on file with the Columbia Law Review).
51. Prior to 1998, the securities market had been governed by a series of regulations. One of the most significant is the Administrative Provisional Regulations on the Issuance and Trading of Securities. See Liu Zhenxian, "Zhengquan fa" licheng: Guowuyuan liudao jinpai goucheng jinri fengjing [Development Process of the Securities Law: Six Gold Medals from the State Council Created Today"s Landscape], Xinhuanetcom, Apr. 19, 2005, at http://news.xinhuanet.com/fortune/2005-04/19/content_2848072.htm (on file with the Columbia Law Review).
52. The 2005 Securities Law continues this authority, stating that the CSRC is to "carry out supervision and administration of the securities market" and is responsible for investigating and punishing any violations of the securities laws. Zhengquan fa [Securities Law] (promulgated by the Standing Comm. Nat'l People's Cong., Oct. 27, 2005, effective Jan. 1, 2006), arts. 178-179, translated in LawInfoChina (lastvisited Feb. 20, 2008) (P.R.C.) [hereinafter 2005 Securities Law].
53. Whether the 1998 law authorized civil lawsuits is a topic that has generated disagreement. Article 63 of the 1998 law stated that individuals and companies who committed misrepresentation should pay for any resulting harms - strongly suggesting that litigation could be used. In practice, however, courts did not view this provision as authorizing civil lawsuits. Chinese scholars have argued that the courts, in refusing to accept such suits, were ignoring the law. Zhengquan fa [Securities Law] (promulgated by the Standing Comm. Nat'l People's Cong., Dec. 29, 1998, effective July 1, 1999), art. 63, translated in LawInfoChina (last visited Feb. 20, 2008) (P.R.C.) [hereinafter 1998 Securities Law].
54. Zuigao Renmin Fayuan guanyu she zhengquan minshi peichang anjian zan buyu shouli de tongzhi [Notice of the Supreme People's Court on Refusing to Accept Civil Compensation Cases Involving Securities for the Time Being] (promulgated by Sup. People's Ct., Sept. 21, 2001, effective Sept 21, 2001) (P.R.C), available at http://www.law-lib.com/law/law_viewl.asp?id=16373 (on file with the Columbia Law Review).
55. For the full text of the 2002 SPC Guideline, see Zuigao Renmin Fayuan guanyu shouli zhengquan shichang yin xujia chenshu yingfa de minshi qinquan jiufen anjian youguan wenti de tongzhi [Supreme People's Court's Notice Regarding Accepting Tort Cases Arising from Stock Market False Disclosure] (promulgated by the Sup. People's Ct., Jan. 15, 2002, effective Jan. 15, 2002), art. 2, translated in LawInfoChina (last visited Feb. 20, 2002) (P.R.C.) [hereinafter 2002 SPC Guideline].
56. For the full text of the 2003 SPC Regulation, see Zuigao Renmin Fayuan guanyu shenli zhengquan shichang yin xujia chenshu yingfa de minshi peichang anjian de ruogan guiding [Several Regulations of the Supreme People's Court Regarding Trying Civil Compensation Cases Arising from Stock Market False Disclosure] (promulgated by the Sup. People's Ct., Jan. 9, 2003, effective Jan. 9, 2003) (P.R.C), available at http://www.court.gov.cn/lawdata/explain/civil/ 200312220011.htm. (on file with the Columbia Law Review) [hereinafter 2003 SPC Regulation]. In particular, see articles 5 and 6 which regulate the imputation of liability and joint liability, respectively.
57. Id. arts. 5, 7 (regulating imputation of liability and calculation of damages, respectively). The 2002 SPC Guideline was silent on this issue. In practice, the CSRC rarely disciplines corporate officials for misrepresentations without also sanctioning the company.
58. The CSRC technically may also issue reprimands referred to as "notices of criticism" (tongbao piping). It does so only rarely, and such notices do not appear to be a key regulatory tool of the CSRC.
59. In most cases companies or individuals are both fined and warned; in a small number of cases the CSRC has imposed either only a warning or only a fine.
60. 2005 Securities Law, supra note 36, art. 193.
61. Id. art. 233. Further details regarding individuals subject to bans are set forth in the Zhengquan shichang jinru guiding [Provisions on Banning the Entry into the Securities Market] (promulgated by the China Sec. Regulatory Comm'n, June 7, 2006, effective July 10, 2006), translated in LawInfoChina (last visited Feb. 1, 2008) (P.R.C.) [hereinafter Provisions on Banning Entry]. Market bans are not technically considered to be administrative sanctions. In practice, however, individuals who are banned are also subject to administrative sanctions.
62. Source: China Securities Regulatory Commission, at http://www.csrc.gov. cn/n575458/n575742/n576221/index.html (last visited Feb. 16, 2008) (on file with the Columbia Law Review). One case from 2001 appears to be missing from the website and thus is not included in the table. Note that there may be some discrepancies between our numbers here and those currently available on the website primarily because not all cases are posted to the websites at all times. Our data reflects the data available as of year end 2006.
63. Interview 2006-61.
64. There is no comprehensive source of data on cases filed. Data on the number of companies sued is based primarily on review of Chinese media reports: We searched the media for reports of any cases of investor lawsuits during the period under study. Our estimate has been confirmed by conversations with both plaintiffs' lawyers and Supreme People's Court officials. Id.
65. Interview 2006-70.
66. Id.
67. See Lu Zhou, Shouli kuaiji shiwusuo bei panfa [The First Judgment Penalizing an Accounting Firm], Beijing qingnian bao [Beijing Youth Daily], Aug. 3, 2006, available at http://www.p5w.net/news/gncj/200608/t451328.htm (on file with the Columbia Law Review).
68. The CSRC issued such limitations through a number of opinions and notices. In general terms, the CSRC prohibits non-arms-length transactions between related parties that will damage the interests of listed companies. In addition, those who damage the interests of listed companies through such transactions may be subject to liability. For full texts of the relevant CSRC opinions and notices, see Guowuyuan pizhun Zhengjianhui guanyu tigao shangshi gongsi zhiliang yijian de tongzhi [Notice of the State Council Regarding the Approval and Dissemination of the Suggestions of the CSRC on the Improvement of the Quality of Listed Companies] (promulgated by the St. Council, Oct. 19, 2005, effective Oct. 19, 2005) (P.R.C.), at http://www.gov.cn/zwgk/2005-11/01/ content_88761.htm (on file with the Columbia Law Review);
69. Guanyu shangshi gongsi shenru xuexi "xing fa xiuzhen an (Hu)" youguan shiyi de tongzhi [Notice Regarding the Intensive Study by Listed Companies of "Amendment of the Criminal Law (6)"] (promulgated by the China Sec. Regulatory Comm'n, July 12, 2006, effective July 12, 2006) (P.R.C.), at http://www.chinaacc.com/new/ 63%2F69%2F112%2F2006%2F7%2Fzh81338821171760024208-0.htm (on file with the Columbia Law Review);
70. Guanyu fabu shangshi gongsi guquan fenzhi gaige guanli banfa de tongzhi [Notice Regarding the Release of the "Listed Companies Share Allocation Reform Management Procedures"] (promulgated by the China Sec. Regulatory Com'n, Sept. 4, 2005, effective Sept. 5, 2005) (P.R.C.), at http://www.sse.com. cn/cs/zhs/xxfw/flgz/regulations/listedco/listed20050905.htm (on file with the Columbia Law Review).
71. Cf. Benjamin Liebman, Watchdog or Demagogue? The Media in the Chinese Legal System, 105 Colum. L. Rev. 1, 31 n.119 (2005) [hereinafter Liebman, Watchdog or Demagogue] (discussing how media promotes corporate information disclosure). The CSRC has issued a number of regulations requiring listed companies to disclose information. For example, in January 2007, the CSRC promulgated Administrative Measures Concerning the Information Disclosure of Listed Companies, pursuant to which listed companies must disclose annual, interim, and quarterly reports. Listed companies must also make disclosure immediately after the occurrence of significant events that might affect the trading prices of their securities.
72. For the full text of the Measures, see Shangshi gongsi xinxi pilu guanli banfa [Administrative Measures Concerning the Information Disclosure of Listed Companies] (promulgated by the China Sec. Regulatory Comm'n, Jan. 30, 2007, effective Jan. 30, 2007) (P.R.C.), at http://www.gov.cn/ziliao/flfg/2007-02/13/ content_525673.htm (on file with the Columbia Law Review).
73. See Allen et al., Economic Growth., supra note 12, at 75.
74. Id.
75. See supra Part I.A.
76. 1998 Securities Law, supra note 37, art. 95.
77. See Zhengquan jiaoyisuo guanli banfa [Measures for the Administration of Securities Exchanges] (promulgated by the China Sec. Regulatory Comm'n, Dec. 12, 2001, effective Dec. 12, 2001), arts. 6, 7, 8, 29, translated in LawInfoChina (last visited Feb. 23, 2008) (P.R.C.) (prescribing CSRC powers); 2005 Securities Law, supra note 36, art. 107 (stating that general manager of stock exchange shall be subject to appointment and dismissal by state regulatory authority).
78. 1998 Securities Law, supra note 37, arts. 55-56. Article 57 of the 1998 Securities Law stated that the CSRC could delegate such power to the exchanges. Id. art. 57.
79. Chenxia Shi, Protecting Investors in China Through Multiple Regulatory Mechanisms and Effective Enforcement, 24 Ariz. J. Int'l & Comp. L. 451, 471 (2007).
80. 2005 Securities Law, supra note 36, art. 55.
81. Id. art. 56. The new law also permits the exchange to establish listings requirements that are higher than those set by the 1998 Securities Law. In addition to specifying certain conditions under which trading may be suspended or a company may be delisted, the 2005 Securities Law also states that the exchange may specify in its listing rules other situations in which a company may be delisted or have trading suspended. Article 60 of the 2005 Securities Law gives the exchanges the power, under certain circumstances, to temporarily suspend trading in bonds, and article 61 grants the exchanges similar power to delist companies' bonds. Id. arts. 60-61. The provisions, however, do not grant discretion to the exchanges to specify additional conditions leading to suspension of trading in bonds. This may reflect the fact that China's bond market is fragmented, with only some forms of bonds being traded on the stock exchanges.
82. Id. art. 102. The revised securities law also states that administrative review of decisions to suspend trading or to delist companies shall be handled by a body established by the exchanges. Thus under article 62 of the new law, stock exchange decisions to delist or suspend trading in shares or bonds are not subject to review by the CSRC. Id. art. 62. Prior to the new law, administrative review of decisions to suspend or delist shares was handled by the CSRC. Zhongguo Zhengquan jiandu guanli weiyuanhui xingzheng fuyi banfa [Measures of China Sec. Regulatory Comm'n for the Admin. Reconsideration] (promulgated by the China Sec. Regulatory Comm'n, Nov. 25, 2002, effective Jan. 1, 2003), art. 4, translated in LawInfoChina (last visited Feb. 1, 2008) (P.R.C.). A third potentially significant change is the omission of a reference to the exchanges as "non-profit." Thus, in theory, exchanges could be restructured into for-profit organizations.
83. See, e.g., Fang Yuan, Quanli xiafang zhihou: jiaoyisuo zhimian "sanchongmen" [After the Delegation of Authority: the Exchange Faces Three Gates], 21 Shiji jingji bao [21st Century Economic Reports], Nov. 2, 2005, available at http://www.nanfangdaily.com.cn/jj/20051103/cj/200511020056.asp (on file with the Columbia Law Review);
84. Hubei Stock Depository Ctr., Xin "Zhengquan fa" wanshan zhengquan shichang jianguan zhidu de fali jiedu [Jurisprudential Explanations of the Improvement of the Oversight System of the Securities Market from the New "Securities Law"], available at http://www.hbgufen.com/nhbgufen/ hbgqtgzx/Article_Show.asp?ArticleID=1799 (last modified Jan. 9, 2006) (on file with the Columbia Law Review);
85. Xu Jian, Wanquan jiedu "Zhengquan fa" xiuding an [A Complete Explanation of the Revision of the "Securities Law"], Diyi caijin ribao [Number One Finance and Economics Daily], Oct. 28, 2005, available at http://dycj.ynet.com/article.jsp?oid=6665318 (on file with the Columbia Law Review);
86. Zhang Hanqing, "Zhengquan fa" xiugai jiang gei shichang dailai xin lihao ["Securities Law" Revision Will Bring New Advantages to the Market], Xinhuanet.com, Oct. 29, 2005, at http://news.xinhuanet.com/fortune/ 2005-10/29/content_3698917.htm (on file with the Columbia Law Review).
87. Zhang Weijing & Xiao Huadong, Xin zhengquan fa chutai zhihou [After the New Securities Law Comes Out], Liaowang dongfang zhoukan [Eastern Outlook Weekly], Nov. 11, 2005, available at http://news.sina.com.cn/c/2005-11-09/ 10098250523.shtml (on file with the Columbia Law Review) (reporting on arguments that law makes no substantive changes to division of authority between CSRC and exchanges, in significant part because CSRC continues to select exchanges' senior officials); see also Interview 2006-1; Interview 2006-69.
88. Interestingly, the most extensive treatment of the public criticisms in the English-language literature treats them as indistinguishable from CSRC (government) sanctions, rather than as a self-regulatory initiative of the exchanges. See Chen et al., Toothless Tiger, supra note 9, at 459 (listing public criticism along with CSRC penalties as types of punishments for violations of securities law).
89. We translate the Chinese term for the sanctions, gongkai qianze, as "public criticism." Other writers in English have translated the term as either "public censure" or "public condemnation." Although "public censure" is perhaps a more literal translation of the Chinese, we use "public criticism" because it more effectively conveys the intended reputational effects of such sanctions. The exchanges only started issuing public criticisms in 1999. Wu Zhipan, Zhengquan jiaoyisuo chuliquan wenti yanjiu 33 [Research into Questions Regarding the Sanction Powers of Stock Exchanges], Shenzhen Stock Exchange, Apr. 28, 2005, available at http://www.szse.cn/UpFiles/Attach/1903/2005/04/28/1405348750.doc (on file with the Columbia Law Review) (noting that since beginning of "public criticism" in 1999, almost 100 listed companies have been criticized for irregular information disclosure).
90. Warnings are generally issued for only minor infractions. Oversight letters are slighdy more serious, but are still relatively minor notices to companies that appear primarily designed to elicit further information from companies regarding unusual arrangements or activities. Notices of criticism are more serious, and are one step short of a public criticism. Of these lesser forms of oversight measures, letters of oversight are by far the most common: The Shanghai Stock Exchange issued 716 such letters in 2006, although in prior years the highest total number of such letters was 153. The number of oral warnings and nonpublic notices of criticism issued by each of the two exchanges has generally been a few dozen per year. Interview 2006-99.
91. Notices of criticism, or tongbao piping, the second most serious step the exchanges take against listed companies, are generally not made public. In some cases, however, the exchanges have made such notices public, or companies have disclosed the fact that they have received notices of criticism. News reports also from time-to-time carry details of such nonpublic sanctions. Interview 2006-77. In addition, although notices of criticism from the Shanghai Stock Exchange are distributed only to the company or individuals being criticized, the Shenzhen Stock Exchange distributes notices of criticism to all listed companies. Interview 2006-69. The rationale for informing other companies appears to be that doing so will help the overall functioning of the market by informing all companies of the types of conduct that are being punished. Exchange officials defend the practice of notifying other companies but not the public on the grounds that they are a self-regulatory organization, and are simply making other members of the exchange aware of the misconduct. They also contend that such conduct is not generally so serious as to be of interest to investors. Interview 2007-4.
92. We are grateful to legal practitioners and academics in Hong Kong who made us aware of the provenance of the stock exchange criticisms in China.
93. See, e.g., Dyck & Zingales, Media, supra note 13, at 12-13 (finding that average size of private benefits is far lower for Hong Kong than international average); Alexander Dyck & Luigi Zingales, Private Benefits of Control: An International Comparison 16, 47-59 (Ctr. for Research in Sec. Prices, Working Paper No. 535, 2001), available at http://papers.ssrn.com/so13/ papers.cfm?abstract_id=296107 (on file with the Columbia Law Review) (providing empirical evidence that Hong Kong is among fourteen countries where private benefits are low - three percent of value of equity or less).
94. The Shanghai and Shenzhen Listing Rules were identical in their substantive provisions from 2001 to 2006 - reflecting the fact that the rules are drafted in consultation with, and are approved by, the CSRC. The repeated revisions to the listing rules have tended to strengthen the exchanges' oversight powers by adding more specific requirements regarding disclosure obligations and greater emphasis on making disclosed information available to investors. In addition, various revisions have emphasized the exchanges' self-regulatory authority and have sought to separate the exchanges from the CSRC. For example, earlier versions of the listing rules had stated that the exchanges could refer serious cases of misconduct to the CSRC; such language was omitted in revisions made in 2005. Earlier versions of the listing rules permitted the exchanges to issue fines. In practice, however, they rarely, if ever, did so.
95. See Shanghai zhengquan jiaoyisuo gupiao shangshi guize (2006-05-19 xiuding) [Share Listing Rules of the Shanghai Stock Exchange] (promulgated by the Shanghai Stock Exch., May 18, 2006, effective May 19, 2006) (amended May 19, 2006) (P.R.C), ch. 17, available at http://www.sse.com.cn/cs/zhs/xxfw/flgz/ rules/sserules/sseruler20060519.pdf (on file with the Columbia Law
96. Shenzhen zhengquan jiaoyisuo gupiao shangshi guize (2006 nian 5 yue xiu Ding) [Share Listing Rules of the Shenzhen Stock Exchange] (promulgated by the Shenzhen Stock Exch., May 19, 2006, effective May 19, 2006) (amended May 2006) (P.R.C.), ch. 17, available at http://www.szse.cn/UpFiles/Attach/1412/2006/05/ 18/1831327522.doc (on file with the Columbia Law Review) [hereinafter Shenzhen Listing Rules] (provisions on oversight and punishment).
97. See Shanghai Listing Rules, supra note 73, ch. 12; Shenzhen Listing Rules, supra note 73, ch. 16.
98. Shenzhen zhengquan jiaoyisuo zhongxiao chuangye bankuai shangshi gongsi dongshi xingwei zhiyin [Guidelines for Behavior by Directors of Companies Listed on the Small and Medium Enterprise Board of the Shenzhen Exchange] (promulgated by the Shenzhen Stock Exch., Mar. 1, 2005, effective Mar. 1, 2005) (P.R.C.), art. 41, available at http://www.szse.cn/main/rule/jysywgz/200503036850.shtml (on file with the Columbia Law Review) [hereinafter Guidelines for Behavior]. Other circumstances giving rise to a ban on serving as a director include a finding that the individual has insufficient time to dedicate to company business, being subject to two public criticisms from the CSRC within three years, serious dereliction of duty or misuse of position, or causing serious harm to the company or the interests of public shareholders. Id. The Shanghai Stock Exchange does not appear to have adopted similar rules.
99. Interview 2007-1.
100. Id.; Interview 2007-5.
101. Interview 2007-4.
102. Id. Officials also state that from time to time they may adjust the standards, and that making specific thresholds public might make such adjustments more difficult.
103. Interview 2006-72.
104. It is procedurally easier for the exchanges to issue lesser sanctions than more serious ones. In Shanghai, for example, individual departments within the exchange may issue oral warnings and oversight letters without approval of senior stock exchange officials outside their departments. Most are issued by the Listed Companies Department. Interview 2006-68. Both notices of criticism and public criticisms are prepared by individual departments, generally the Listed Companies Division, but then must be approved by the Stock Exchange Council, which includes directors of the exchange and also department heads from the exchange. Interview 2006-69(2).
105. Multiple sanctions against a single company reflect multiple instances of misconduct. The exchanges do not criticize a company twice for the same conduct, although companies frequendy have multiple problems - and uncovering one problem may lead the exchanges to discover others. Interview 2006-69(2).
106. The data include all publicly available exchange-issued public criticisms. It is possible that a small number of additional public criticisms were issued but not listed on the exchange's website.
107. Numbers of listed companies are from the websites of the Shanghai and Shenzhen Stock Exchanges.
108. These categories are our own, and are based on review of the public criticisms.
109. The following table lists the frequency with which various types of criticisms are issued by the exchanges over the period 2001-2006. A company is sanctioned when the exchange issues a criticism. Many sanctions punish companies for multiple cases of misconduct. In such cases, the table counts a reason as a percentage of the total number of reasons given for the criticism (e.g., a company that is sanctioned for false disclosure and for failure to issue scheduled reports on time is counted as 0.5 in each category). Thus the total number of companies sanctioned for each category of wrongdoing is in fact higher than indicated in the table below: Reason for Sanction Shanghai Shenzhen 1. False Information Disclosure or seriously misleading statements 7+2/3 (7.30%) 12+1/12 (8.11%) 2. Profit forecast not accurate or not timely (generally failure to amend forecasts in cases of significant discrepancy or frequent changes to predictions) 21+1/3 (19.57%) 30+1/4 (20.30%) 3. Failure to timely disclose major corporate matters 37 (33.94%) 44+3/4 (30.03%) 4. Failure to carry out approval procedures for related-party transactions 17 (15.60%) 24+5/12 (16.39%) 5. Failure to issue scheduled reports on time 23 (21.10%) 26 (17.45%) 6. Failure to carry out other legally-required obligations 3 (2.75%) 11+1/2 (7.72%) Total, 2001-2006 109 149
110. Interview 2007-29.
111. Forty of the sanctions in Shenzhen were against only companies and not individuals; fifty-five Shanghai sanctions involved only companies.
112. We arrived at these numbers after reviewing the data and counting up all the publicly issued sanctions individually. See supra note 82 and accompanying text.
113. Chinese company law provides for a German-inspired supervisory board as well as a board of directors. Most commentators are critical of the corporate governance role actually performed by the supervisory board in Chinese corporations. See, e.g., Chao Xi, In Search of an Effective Monitoring Board Model: Board Reforms and the Political Economy of Corporate Law in China, 22 Conn. J. Int'l L. 1, 3-7, 12-13 (2006) (discussing factors that contribute to "figurehead" status of typical Chinese supervisory boards including limited disclosure of company information, lack of attendance requirements for board meetings, inability to consult with outside experts, and not having enough truly independent members).
114. In contrast, during the same period the CSRC issued market bans, ranging from three years to life, against eighty-two individuals. CSRC regulations specify that the CSRC may ban individuals found to have committed serious breaches of the law or administrative regulations from participation in China's securities market for periods ranging from three years to life. Provisions on Banning Entry, supra note 45. In contrast to CSRC market bans, exchange declarations of unfitness to serve have no time limit. See Shanghai Listing Rules, supra note 73, ch. 17 (stating power to declare unfit but does not mention time limit); Shenzhen Listing Rules, supra note 73, ch. 17 (same).
115. We arrived at these numbers after reviewing the data and counting up all the publicly issued sanctions individually. See supra note 82 and accompanying text.
116. See supra note 82 and accompanying text.
117. Similarly, oversight letters and oral warnings generally relate to violations of exchange rules, and rarely involve overlap with CSRC regulations. Interview 2006-68; Interview 2006-69.
118. Interview 2006-68; Interview 2006-69.
119. Interview 2007-1. As noted above, prior to 2005 the listing rules explicidy stated that the exchanges could refer serious cases to the CSRC.
120. Interview 2006-1; Interview 2006-7.
121. Interview 2007-5.
122. Interview 2006-72.
123. Interview 2007-6.
124. Interview 2006-68; Interview 2006-69.
125. Exchange officials state that it is rare for more than six months to elapse from the time the exchange uncovers wrongdoing to the time they issue a sanction, and that they frequendy issue public criticisms within one or two months. Interview 2007-5.
126. For example, the CSRC did not issue punishments against Xintai Technology Company for improper accounting practices and making untrue statements until two years after the wrongdoing. See CSRC, Zhongguo Zhengjianhui xingzheng chufa jueding shu [CSRC Administrative Sanction Decision], available at http://www.csrc.gov.en/n575458/n776436/n3376288/n3376382/n3418730/n3418896/ 3471416.html (last visited Feb. 16, 2008) (on file with the Columbia Law Review). Likewise, the CSRC did not issue punishments against Fujian Provincial Shenlong Development Company for various wrongdoings that occurred in 2001 until 2004, three years after the wrongdoing.
127. See CSRC, Zhongguo Zhengjianhui xingzheng chufa jueding shu [CSRC Administrative Sanction Decision], available at http://www.csrc.gov.cn/n575458/ n776436/n3376288/n3376382/n3418730/n3418940/3440261.html (last visited Feb. 16, 2008) (on file with the Columbia Law Review);
128. Jing Ru Shi Tou, Guanyu shenli zhengquan shichang yin xujia chenshu yinfa de minshi peichang anjian de ruogan guiding de fenxi [Analysis of Certain Rules of the Supreme People's Court Regarding Civil Compensation Lawsuits Arising from Stock Market False Statements], Dongfang boke [East Blog], June 1, 2007, at http://blog4.eastmoney.com/chujun006,443582.html (on file with the Columbia Law Review). In general, the CSRC is perceived as moving slowly in its sanctioning activity. Interview 2007-5.
129. Interview 2006-61; Interview 2007-35.
130. Interview 2006-61.
131. Interview 2006-63; Interview 2007-1; Interview 2007-6.
132. Interview 2007-5.
133. Interview 2007-35.
134. Interview 2007-1.
135. Id.
136. Id.; Interview 2007-6. This suggestion, however, may be undermined by the fact that the CSRC still maintains the ability to dictate outcomes to the exchanges. Thus in more serious cases, companies will still seek to influence the exchanges by influencing the CSRC. This is particularly true for the most powerful companies.
137. Shenzhen criticizes from 3% to 6% of listed firms in a given year, and its total criticisms equal 28% of the average number of listed firms over the six year period. Shanghai has consistendy criticized about 2% of listed firms in a given year, and its total criticisms constitute 14% of the average number of listed firms over the six year period. These percentages were calculated from Table 4. See supra Table 4.
138. Chen et al., Toothless Tiger, supra note 9, at 469.
139. Interview 2006-68; Interview 2006-69.
140. Interview 2007-7; Interview 2007-35. Some Shenzhen officials do, however, also accept that large state-owned companies, which predominate in Shanghai, may also have stronger corporate governance practices than many of the small private companies listed in Shenzhen. Interview 2007-1; Interview 2007-7.
141. The total is eighty-three, not the eighty-seven reported in Table 3, because four sanctions reported there were against individuals only.
142. Interview 2007-7; Interview 2007-35.
143. Interview 2007-1; Interview 2007-5.
144. See supra note 73 and accompanying text; infra note 166 and accompanying text.
145. Interview 2007-29.
146. Id.
147. Id.; Interview 2007-30; Interview 2007-34.
148. Interview 2007-34. The lawyer gave the example of disclosure requirements regarding related party transactions, whereby companies are required to disclose transactions beyond a certain size. As the lawyer explained, one company he represents engaged in transactions that exceed this threshold every day, thus in principle requiring disclosure of each. He asserted that the Shanghai Exchange would understand if the company failed to disclose each individual transaction, while the Shenzhen Exchange "would just sanction you." Id.
149. Interview 2006-68; Interview 2006-69; Interview 2007-1.
150. Interview 2006-72; Interview 2007-5.
151. Interview 2006-68; Interview 2006-69.
152. Interview 2006-68; Interview 2006-69; Interview 2006-72; Interview 2007-1.
153. Interview 2006-70. Lawyers, exchange officials, and company managers say that it is rare for companies to involve lawyers in such negotiations. Interview 2007-29; Interview 2007-34. Doing so, said one CEO, would simply make matters more tense. Interview 2007-29. Exchange officials say that they are unlikely to be influenced by nonlegal arguments - but also acknowledge that they sometimes cannot avoid other forms of pressure. Interview 2006-72. One CEO said that companies facing sanction will first seek to argue their case with lower-ranking officials on the merits, but will not hesitate to seek out more senior officials if necessary to avoid being sanctioned. Interview 2007-29.
154. Interview 2006-68; Interview 2006-69.
155. Interview 2007-4.
156. This is particularly the case when individuals can show that they objected to the decision or action that resulted in the sanction. Id. Officials also said that in some cases companies provide additional facts that persuade the exchange that the initial infraction was not as serious as first contemplated. Id.
157. Interview 2007-5. Senior officials of the exchange participate in the committee, and thus may exert some influence on committee votes, but they formally only have individual votes in committee discussions. Interview 2007-1; Interview 2007-5.
158. Interview 2007-7.
159. Interview 2006-71; Interview 2007-1.
160. Interview 2007-1.
161. εi
162. We excluded from the sample firms for which complete data were unavailable, firms that were delisted, and firms where share trading had been suspended or otherwise displayed erratic and unexplained price movements. The sample was comprised of sixtyeight observations for the Shanghai Exchange and ninety-eight observations for the Shenzhen Exchange.
163. Negative abnormal returns on the Shenzhen Exchange were only marginally significant using a five day event window. We acknowledge the possible tension between the relative statistical strength of the market reaction to the Shanghai Exchange criticisms vis-à-vis those of the Shenzhen Exchange on the one hand, and our conclusion in Part II.C that the Shenzhen Exchange appears to be pursuing a stricter regulatory strategy than its counterpart in Shanghai on the other.
164. We again excluded from the sample firms for which complete data were unavailable, firms that were delisted, and firms where share trading had been suspended or otherwise displayed erratic and unexplained price movements. The sample was comprised of eighty-seven observations for the Shanghai Exchange and 138 observations for the Shenzhen Exchange.
165. Of course, we cannot rule out the possibility that causation runs in the other direction in some or many cases: namely, that corporate disclosure of bad conduct prompted a stock exchange criticism shordy thereafter. But given that the companies in our sample were criticized for failure to make timely disclosure of material facts or failure to abide by related party transaction procedures (not for disclosing bad conduct alone), it seems rather unlikely that a large number of the firms in our sample suddenly - unprompted by any regulatory pressure - decided to disclose past bad conduct, leading ultimately to a stock exchange criticism.
166. Chen et al., Toothless Tiger, supra note 9, at 470-73. Due to the methodology employed by the authors of this study, however, these findings are not directly comparable to ours because their data include some public criticisms issued by the CSRC as well as the stock exchanges; also they cover an earlier time period.
167. For example, one study of the consequences of exchange sanctions in 2001 and 2002 found significant market reactions to public criticisms imposed by the exchanges. The study found that the effects were insignificant in cases where the misconduct had already been disclosed. Dong Jun, Zhengquan jiaoyisuo gongkai qianze zhidu you xiaoxing de shizheng yanjiu [Empirical Research into the Effectiveness of the Public Criticism System of Stock Exchanges], 15 World Econ. Outlook 8, 10 (2004). Another study examined the market effects based on the type of conduct being sanctioned, finding that misrepresentations regarding income-related information and violations relating to failure to disclose related party transactions or financial guarantees had the most significant effects on share price; sanctions relating to untimely disclosure and unauthorized use of funds generated no significant market reaction.
168. However, the study did not distinguish between CSRC and exchange sanctions. Xue Feng, Dong Yingying & Guan Wei, Zhongguo shangshi gongsi gupiao xinyong fengxian de shijian yanjiu [An Event-Study on Credit Risk of the Stocks of Chinese Listed Companies], Zhongyang caijing daxue xuebao [4 J. Cent. U. Fin. & Econ. 35, 35-38 (2004)].
169. For example, one study that examined sanction data from 1993 to 2001 (including both exchange and CSRC sanctions) found significant market effects of public sanctions, but no effects of nonpublic sanctions and warnings. The study also found greater effects of exchange sanctions than CSRC sanctions, with the authors suggesting that the likely reason was prior market awareness of CSRC proceedings. Mao Zhirong & Wu Linyang, Xinxi pilu weigui chufa shiji xiaoguo yanjiu [Research on the Actual Effects of Sanctions for Violations of Information Disclosure Regulations], Zhengquan shibao [Securities Times], May 21, 2002, available at http://www.chinacfa.cn/jinronglunwen/zhengquanqihuo/ gupiaoshichang/gupiaoshichang14455.html (on file with the Columbia Law Review).
170. Another early study of exchange and CSRC sanctions using event study methodology likewise found that exchange sanctions had more significant effects than CSRC sanctions. Wen Shouxun & Yang Wu, Shangshi gongsi weigui xinxi pilou chufa xiaoguo de yanjiu [Research on Penalty Effects of Listed Firms' Information Disclosure Violations], Chongqing daxue xuebao [25 J. Chongqing U. 83, 85 (2002)];
171. see also Yan Guoxing, Chen Chao & Zhou Xiaohe, Shangshi gongsi weigui chufa shizheng fenxi [Empirical Analysis of Sanctions Against Listed Companies for Violations of Regulations], Jingji luntan [Economic Tribune], Apr. 2006, at 111 (arguing exchange sanctions have greater effect on share price than CSRC sanctions due to market awareness of CSRC proceedings before sanction announcements; also finding many sanctioned companies come from electronic and light manufacturing industries, and arguing high rate of recidivism suggested low deterrence value of both CSRC and exchange sanctions).
172. Such findings are not uniform: A study that used event study methodology to analyze CSRC and exchange sanction data from 1999 to 2005 found that market reaction to exchange public criticisms was weaker than that to CSRC sanctions. The study found a significant negative market reaction to both CSRC sanctions and exchange public criticisms. The study also showed market reactions strengthening over time. Zhang Hong, Shenzhen Stock Exchange, Shangshi gongsi weigui tezheng ji chufa youxiaoxing yanjiu 20-23 [Research into the Special Characteristics of Violations of Regulations by Listed Companies and the Effectiveness of Sanctions], available at http://www.szse.cn/UpFiles/Attach/ 1947/2006/04/03/1052192247.doc (last visited Jan. 30, 2008) (on file with the Columbia Law Review).
173. One study argued that the effects of public criticism have actually weakened over time, and that the stock prices of some companies have increased upon the company being publicly criticized. The study's findings were largely anecdotal, however, and the author does not appear to have used event study methodology. See Zhang Xuming, Cong "gongkai qianze" de xiaoguo ruohua tan woguo shangshi gongsi de jianguan [Discussing Oversight of Listed Companies in Our Nation from the Perspective of the Weakening Effects of "Public Criticisms"], Hubei jingji xueyuan xuebao: ren wen she hui ke xue ban [J. Hubei U. Econ. (Human. & Soc. Sci.)], Apr. 2005, at 132-33. One author cited the ineffectiveness of exchange sanctions as an argument for strengthening a legal approach to regulating corporate misconduct.
174. Li Dongping, 477 Ci qianze buru 1 ci panjue [477 Criticisms Are Not as Valuable as 1 Court Judgment], Zhengquan shibao [Securities Times], Dec. 1, 2004, available at http://yjbg.stock.cnfol.com/041201/139,1333,1136284,00.shtml (on file with the Columbia Law Review).
175. We thank John Coffee for raising this possible interpretation of our findings.
176. For a list of the companies directly controlled by the Assets Commission (also called "central enterprises"), see Zhongyang qiye minglu [Central Enterprises List], at http://www.sasac.gov.cn/n1180/n1226/n2425/index. html (last visited Feb. 25, 2008) (on file with the Columbia Law Review).
177. Provincial assets commissions likewise hold shares in key provincial companies.
178. Criticisms for minor misconduct - most often failure to file timely reports - have been excluded. Information on ownership was obtained from review of company annual reports.
179. These estimates are supported by public official statements. For example, in 2006 the head of the national State Assets Commission stated that 56% of listed companies were controlled by the Commission or the equivalent local-level state assets departments. Guowuyuan guoyou zichan jiandu guanli weiyuanhui guanyu yinfa Li Rongrong tongzhi zai quanguo guoyou zichan jiandu guanli gongzuo huiyi shang de jianghua de tongzhi [Notice Regarding the Printing and Circulation of the Speech Given by Mr. Li Rongrong in the National State Assets Supervision Working Meeting], Mar. 6, 2007, available at http://law.baidu.com/ 0036547200006e61dc971027870e0e351d68ec7ef856.html (on file with the Columbia Law Review).
180. We thank Robert Scott for suggesting this alternative interpretation of our data.
181. Reputational penalties affect the present value of the firm by raising the future costs or lowering future revenues as counterparties change the terms on which they will do business with the firm. They are distinguished from higher costs (lower revenues) due to regulatory penalties or litigation.
182. Shangshi gongsi zhengquan faxing guanli banfa [Administrative Measures for the Issuance of Securities by Listed Companies] (promulgated by the China Sec. Regulatory Comm'n, May 6, 2006, effective May 8, 2006), arts. 11, 39, translated in LawInfoChina (last visited Feb. 24, 2008) (P.R.C.). Similar restrictions apply if the company or its senior officials have been subject to administrative punishment from the CSRC within the prior three years.
183. Id. art. 39. Private placements are barred if current directors or senior management have been given administrative punishment by the CSRC within the past three years. The rules do not appear explicitly to ban a company from selling shares through a private placement if the company or its supervisors, or any directors or senior officers who have already been removed from office, have been sanctioned. The rules thus could be read to permit a private offering where only the company or supervisors have been publicly criticized or where directors have been sanctioned but removed from office. The rules thus suggest that looser rules apply for private placements than for public offerings, and may reflect CSRC policy of encouraging private offerings.
184. Shouci gongkai faxing gupiao bing shangshi guanli banfa [Measures for the Administration of Initial Public Offering and Listing of Stocks] (promulgated by the China Sec. Regulatory Comm'n, May 17, 2006, effective May 18, 2006), art. 23, translated in LawInfoChina (last visited Feb. 24, 2008) (P.R.C.).
185. In the case of individuals sanctioned by the CSRC, the specified period is three years. Rules that were in force between 2002 and 2006 likewise stated that listed companies seeking to issue new shares could not do so if they or any director had been subject to a public criticism by a stock exchange within the prior twelve months. Guanyu shangshi gongsi zengfa xingu youguan tiaojian de tongzhi [Notice Regarding Conditions Related to Supplemental Offerings of New Shares by Listed Companies] (promulgated by the China Sec. Regulatory Comm'n, July 24, 2002, effective July 24, 2002) (repealed May 8, 2006) (P.R.C.), art. 7, at http://www.cas.cn/html/Dir/2002/07/24/8316.htm (on file with the Columbia Law Review). The rules did not appear to cover public criticisms against supervisors or senior management. Similar restrictions applied if the company or directors had been punished by the CSRC in the prior year. Rules in place beginning in 2001 likewise stated that, in deciding whether to authorize a company to issue new shares, the CSRC should give "substantial consideration" to whether the company had been sanctioned by an exchange or by the CSRC within the past year.
186. One lawyer recounted how the Shenzhen Exchange had used the threat of a public criticism for unrelated conduct to push a company to complete its corporate restructuring more quickly. Interview 2007-34.
187. Id.
188. Interview 2006-1; Interview 2007-5.
189. Interview 2006-68; Interview 2006-69.
190. Interview 2006-68; Interview 2006-69; Interview 2006-72.
191. Duanqi rongziquan guanli banfa [Management Methods Regarding Short-Term Financial Securities] (promulgated by the People's Bank of China, May 23, 2005, effective May 23, 2005) (P.R.C.), art. 10, available at http://www.pbc.gov.cn/ detail.asp?col=330&ID=570 (on file with the Columbia Law Review).
192. Interview 2006-1M.
193. Interview 2006-1M; Interview 2007-5.
194. Interview 2007-1.
195. Interview 2007-5.
196. Shangshi gongsi zhili zhunze [Provisions on the Management of Listed Companies] (promulgated by the China Sec. Regulatory Comm'n, July 7, 2002, effective July 7, 2002) (P.R.C.), arts. 49-51, at http://www.csrc.gov.cn/ n575458/n870297/n4240488/n8639601/8662692.html (on file with the Columbia Law Review4
197. Donald C. Clarke, The Independent Director in Chinese Corporate Governance, 31 Del. J. Corp. L. 125, 177, 189-201 (2006).
198. Shenzhen Stock Exch., Duli dongshi beian banfa [Methods for the Recording of Independent Directors] (promulgated by the Shenzhen Stock Exch., May 20, 2005, effective May 20, 2005) (P.R.C.), art. 3, available at http://www.szse.cn/main/rule/jysywgz/fxywgz/200604058434.shtml (on file with the Columbia Law Review). Rules governing the Shenzhen SMEB also state that the chairman of a company's board of directors should resign if the company (not the individual) is subject to an administrative penalty from the CSRC or a public criticism from the Shenzhen Stock Exchange and the violation is "serious." See Guidelines for Behavior, supra note 75, art. 29. The regulations state that the chairman shall personally apologize to shareholders, and in serious circumstances resign. Similarly, article 41 of the regulations state that an individual who has been subject to two or more exchange public criticisms or three or more exchange internal criticisms within a three year period will be deemed to be unsuitable to serve as a director for companies listed on the SMEB. Id. art 41. Similar provisions apply if the individual has been criticized by the CSRC twice within three years.
199. See Duli dongshi beian banfa [Methods for the Recording of Independent Directors] (promulgated by the Shenzhen Stock Exch., May 20, 2005, effective May 20, 2005) (P.R.C.), art. 8, available at http://www.szse.cn/main/rule/jysywgz/ fxywgz/200604058434.shtml (on file with the Columbia Law Review) (providing full text of Methods for Recording of Independent Directors of Shenzhen Exchange).
200. Shanghai does not appear to have similar rules.
201. Interview 2007-1. Exchange officials state that it is somewhat rare for directors at one company to serve as directors elsewhere, although some independent directors serve at multiple companies. Interview 2007-5.
202. Guanyu fabu "shangshi gongsi guquan jili guanli banfa" (shixing) de tongzhi [Notice of the China Securities Regulatory Commission on Promulgating the Measures for the Administration of Equity Incentive Plans of Listed Companies (For Trial Implementation)] (promulgated Dec. 31, 2005, effective Jan. 1, 2006), art. 8, translated in LawInfoChina (last visited Feb. 24, 2008) (P.R.C).
203. Zhongxiao qiyeban touzizhe quanyi baohu zhiyin [Investors' Rights Protection Guidance for the Small and Medium Enterprises Board] (promulgated by the Shenzhen Stock Exch., Jan. 12, 2006, effective Jan. 12, 2006) (P.R.C.), art. 43, at http://www.szse.cn/main/rule/jysywgz/200604058452.shtml (on file with the Columbia Law Review). Similar provisions do not appear to apply to the primary Shenzhen board or on the Shanghai Exchange. The Shenzhen Investors Rights guidance also requires companies to disclose in the form of an "investors risk disclosure" serious cases of internal or public criticism, or determinations of unfitness to serve against company directors. Id. art. 51.
204. Zhengquan faxing shangshi baojian zhidu zanxing banfa [Temporary Provisions Regarding the Sponsor System for Securities Offerings and Listings] (promulgated by the China Sec. Regulatory Comm'n, Dec. 28, 2003, effective Feb. 1, 2004) (P.R.C.), art. 64, available at http://www.csrc.gov.en/n575458/n776436/ n804920/n2466262/n3567652/3567912.html (on file with the Columbia Law Review).
205. Id.
206. Zhengquan touzi jijin hangye gaoji guanli renyuan renzhi guanli ban fa [Measures for the Administration of Operation of Securities Investment Fund] (promulgated by the China Sec. Regulatory Comm'n, June 29, 2004, effective July 1, 2004), art. 6, translated in LawInfoChina (last visited Feb. 24, 2008) (P.R.C.).
207. Zhongguo zhengquan jiandu guanli weiyuanhui guanyu yinfa "gongkai faxing zhengquan de gongsi xi pilu neirong yu geshi zhun de di 2 hao niandu baogao de neirong yu geshi" (2005 nian xiuding) de tong zhi [Notice of the CSRC Regarding Issuing the "Standards for the Content and Form of Information Disclosure for Publicly Issued Securities, Second Annual Report Contents and Form"] (promulgated by the China Sec. Regulatory Comm'n, Dec. 15, 2005, effective Dec. 15, 2005) (P.R.C.), art. 46, at http://www.csrc.gov.cn/ n575458/n776436/n804965/n3300690/n3300837/n3304236/3327189.html (on file with the Columbia Law Review). The 2005 notice is the most recent notice governing the content and format of annual reports. Similar provisions regarding disclosure of exchange public criticisms existed in notices that applied in prior years, and are also included in the CSRCs notice governing semi-annual reports. Although companies subject to exchange criticisms are required to disclose the fact of the criticisms, they are not generally required to apologize. Interview 2006-1. In two cases in our sample, however, the Shenzhen Exchange ordered sanctioned companies to issue public apologies to stockholders. Both sanctions were issued in 2002.
208. Interview 2007-5. Both exchanges rate the quality of a company's information disclosure, and a public criticism generally correlates with a low or nonpassing rating from the exchanges. The Shenzhen Exchange posts the ratings on its website; the Shanghai Exchange apparendy does not make the ratings public.
209. For an extended discussion of reputation rights of companies and individuals, see generally Benjamin L. Liebman, Innovation Through Intimidation: An Empirical Account of Defamation Litigation in China, 47 Harv. Int'l L.J. 33 (2006) [hereinafter Liebman, Innovation Through Intimidation] (analyzing development and use of defamation cases in China).
210. Interview 2006-63; Interview 2007-5.
211. Interview 2007-34; Interview 2007-35.
212. Interview 2007-34; Interview 2007-35.
213. Interview 2006-72.
214. Id.
215. The company was, at the time, also being investigated by the CSRC. Interview 2007-29. In the case of individuals, however, the consequences for managers and directors of state-owned companies appear to be as or more severe. See infra notes 191-196 and accompanying text.
216. Interview 2007-29.
217. Id.
218. Id.
219. Id.
220. The CEO stated that being sanctioned internally would also affect an individual's long-term job prospects, as individuals are required to disclose the fact they have been sanctioned internally as well as publicly. But the consequences of an internal sanction would not be as severe as those resulting from a public criticism. Id.
221. Id.
222. Id.
223. Interview 2007-1; Interview 2007-5.
224. Interview 2007-5. Exchange officials comment that many such directors appear to have virtually no prior awareness of their legal obligations as directors. See id.
225. Id.
226. Interview 2007-8.
227. Interview 2007-35.
228. Id.
229. Interview 2007-29.
230. Id.
231. One lawyer commented that companies with strong reputations will treat the threat of criticism very seriously; companies already encountering difficulties may be less concerned. Interview 2006-70. Likewise, some companies continue to disregard the threat of exchange sanctions. Interview 2007-9.
232. Another open question is whether companies reform their governance practices in response to or as a means of preventing stock exchange criticisms. We thank Nico Howson for this point. We lack access to the detailed firm-level information necessary to explore this issue.
233. See, e.g., Kahan & Posner, supra note 10, at 368 ("By threatening a significant blow to offenders' reputations, shaming penalties create strong economic and psychological disincentives . . . .").
234. See Liebman, Innovation Through Intimidation, supra note 177, at 83-84 (discussing cultural and historical importance of reputation in China).
235. See Kahan & Posner, supra note 10, at 372-73.
236. See Dyck & Zingales, Media, supra note 13, at 30 (concluding that media plays "important role in shaping corporate policy").
237. Cf. id. at 31 ("[T]he extent of press influence may be largely outside policymakers' control.").
238. Pursuant to a decision issued by the PRC State Council in April 2005, nonpublic/non-state capital shall not invest, establish, or operate any news agencies, publication entities, radio stations, or television stations. See Guowuyuan guanyu fei gongyou ziben jinru wenhua canye de ruogan jueding [State Council Decisions on the Entrance of Nonpublic Capital into Cultural Industries] (promulgated by the St. Council, Apr. 13, 2005, effective Apr. 13, 2005) (P.R.C.), art. 9, available at http://www.gov.cn/gongbao/content/2005/ content_64188.htm (on file with the Columbia Law Review).
239. Liebman, Watchdog or Demagogue, supra note 53, at 1 ("Over the past decade, the Chinese media have emerged as among the most influential actors in the Chinese legal system.").
240. See Mark Magnier, Campaign of Shame Falls Flat in China, L.A. Times, Dec. 18, 2006, at A4.
241. Liebman, Watchdog or Demagogue, supra note 53, at 7 ("Many in China insist that the media are the single most important and effective avenue for citizen redress.").
242. See Allen et al., Economic Growth, supra note 12, at 59-61, 96-99.
243. For further analysis of this question, see Curtis J. Milhaupt & Katharina Pistor, Law and Capitalism: What Corporate Crises Reveal About Legal Systems and Economic Growth Around the World (forthcoming 2008) (manuscript at 3-4, 14, on file with the Columbia Law Review).
244. Liebman, Watchdog or Demagogue, supra note 53, at 107-08 (noting that Chinese media "are one of many competing Party-state institutions seeking to solve problems, expand influence, and force actions by others").