Market reaction & warning mechanism of illegal information disclosure of public companies
Understanding A Stock Market Information disclosure plays a crucial role in regulating the behavior of public companies and protecting the minority shareholders’ interests. Furthermore, an accurate, integrated, timely, and adequate disclosure is a legal obligation for listed companies based on the Securities Law of China. In addition, China is in the middle of a nation-wide crackdown stage on illicit behavior and greedy actions.
However, many listed companies in China intentionally violate the securities laws by providing untrue
information. Furthermore, these firms will delay the announcement time, etc. and other reporting gimmicks for their purposes.
Moreover, these can infringe the interest of the minority shareholders but also threaten the health and stability of the Chinese stock market.
This paper uses companies that violated the information disclosure law as a sample to study the impact of illegal disclosure. It conducts an event study to show the response of the market that follows the punishment announcement.
Then, it forms an explanation of the market response.
Finally, it develops a general model to predict potential illegal disclosure based on fundamental and corporate governance information.
In conclusion, we hope to help investors better understand the mechanism of illegal disclosure. But, moreover, we want to provide a possible way of predicting this illicit behavior.
In China evidence has been shown that tunneling of listed companies is the root cause of information disclosure violation of listed companies.
In addition, insider manipulation of stock prices and other insider dealings is conducted through illegal disclosure.
Lastly, the IPO policy, rights offering policy, special treatment and delisting policy force the listed companies to carry out earnings management, thus they are trapped in information disclosure violations.