One of the China's biggest institution-building challenges today is to develop a healthy and well regulated securities market (Chen et al, 2005). Though political change has been slowed, China has undergone dramatic growth during the past 25 years (Hussain and Chen, 2000). China is going to be the largest economy in the world by the middle of this century. Shanghai Stock Exchange (SSE) was open in December 1990 and July 1991 to encourage the transfer of shares owned by local investors and foreign investors. Their founding came just over a decade after the process of economic liberalization began. The total market capitalization of RMB3500 billion made China the seventh largest in the world by the end of 2004 ( Chen et al., 2005).
China stock market has grown reasonably in size and stature in its short history, but China still has significant distance to travel before it can claim to regulate a truly functional capital market (Liebman and Milhaupt, 2008). The major attraction of China capital market includes corporate transparency, honesty, governance, and the monitoring and regulation of listed firms and financial intermediaries such as stockbrokers ( Anderson, 2000).
According to Shanghai Stock Exchange, there are around 870 companies listed in year 2009, but not all of them are in a financially sound position. Every year, there are some companies received public reprimands. Public reprimand is a sanction that is formal, written, published reproof or warning to a respondent who the Ethics Committee has determined to have breached the Code of Ethical Conduct. Public sanction emphasize how badly Bar and Board of Governors perceive of unethical behavior. The objective is to change bad behaviors (Angones, 2008).
Posner (2006) examine the public reprimand by the stock exchange as a regulatory tool in China. Public reprimand covers varied adverse announcements. Most of the firms in Shanghai Stock Exchange received public reprimand due to their untimely disclosure. Nasdaq provides some of the circumstances which determine the company receives public reprimand. First, a company involved in a pattern of failing to offer advance announcement of press releases to the Nasdaq StockWatch department. Second, a company with a December 31 fiscal year end has not held an annual meeting for the prior year as of early January, but the company has filed a proxy to hold the meeting in the next few weeks.
Public reprimand announcement brings great impact to companies. Chen et al (2005) finds that enforcement action has a negative impact on stock prices. Most firms facing public reprimand announcement suffer from wealth losses. Besides that, Armour et al (2010) finds the reputational sanctions are very real on the disciplined firm which received enforcement notice. The purpose of this study is to investigate the stock price reaction to public reprimand announcement in China stock market, namely Shanghai Stock Exchange.
1.3 Problem Statement
Anderson (2000) find the major attraction of investors in China include corporate transparency, honesty, governance, and the guarding and regulation of listed firms and financial intermediaries such as stockbrokers. The regulatory body plays a crucial role in the development of financial market. The protection of investors' rights is through the enforcement of regulations and laws, with the enforcement being as important as, or more important than, the content of the regulations. When public reprimand announced, a company suffers from abnormal return and reputational sanction. The abnormal stock price return affects a company image.
According to Shanghai Stock Exchange, there are around 125 companies received public reprimands from year 2001 to year 2009. There are variety reason of receiving public reprimands for public traded companies listed on SSE and SZSE. According to Liebman and Milhaupt (2007), there are 109 of public criticisms of listed companies made by Shanghai Stock Exchange and 149 public reprimands announced by Shenzhen Stock exchange from 2001 to 2006. This study emphasizes on the public criticisms in China Securities Market. The creation of a liquid, transparent, and well regulated securities market is important for effective pricing and allocation of capital and the growth of promising companies in the future. This study attempts to examine the effect of public reprimand announcement on stock price in SSE and SZSE using the latest dataset from 2001 to 2009.
Enforcement action produces a negative effect on shareholder value, with the length and magnitude of the price decline depend on the characteristics of each case. The company's market value may fall, and its public image may be damaged. This announcement is reliable to alter the financial market's assessment of the company. The economic cycle hypothesis proposes that enforcement action increases when economic slowdowns, indicating higher level of securities violations (Muradoglu and Huskey, n.d.). There are prior studies on the stock market reaction to public reprimand announcement, but the researches' are mostly conducted in the United States and United Kingdom. This research study bridges the gap by investigating public sanction in China Securities Market.
1.4 Research Question
Is there any announcement effect when the regulator discloses public reprimands.
1.5 Justification of Study
As we know, public reprimand announcement is a bad news disclosure to public. However, research regarding to public reprimand announcement is quite minimal and limited especially in China Securities Market. Thus, this paper examines the stock price response to public reprimand announcement in China Securities Market. The result of this study can further enrich the research on public reprimand and also enhance our understanding towards how the public reprimand announcement is going to affect the stock price in recent years.
Moreover, this study raises the investors' attention towards the corporate governance issue in China Securities Market. Public listed companies should always be transparent and well regulated. Reliable corporate reporting is important to increase public confidence and raise corporate image. Thus, this research increases the investors' awareness about the corporate governance of a public listed company. The investors' become more informed and are able to identify the more socially efficient and market optimal stock portfolios.
On top of that, this study provides some evidence of the impacts of public reprimand announcement. There will be reputational sanction if the company involved in public reprimand. This is truly a bad consequence to the firm. This result helps the investor to manage the risk and losses in their investments. Additionally, the result of this study also raises concern among owners and directors about the importance of maintaining a healthy condition of their corporation. Therefore, the potential wealth loss resulting from public reprimand announcements may motivate the firm owner to supervise and manage their companies more efficiently.
Last but not least, this paper contributes to the society in increasing the public awareness of investing before they invest in listed securities. This is to protect them from investing in a company which is in a bad condition. It is crucial to understand the price behavior of firms subject to public reprimand announcements. This will help the investor to avoid any unnecessary losses.
1.6 Organization of Thesis
The first chapter provides an introductory part related to the topic, issue, the briefly overview, the problem statements, the objectives and also the significance of the study.
Chapter 2 is the literature review. It includes an extensive review of international journals, reports and articles of various researches in the field. All the reviews in this chapter are related to the problem of the research that will guide to build a research to build a research framework. This chapter also discuss on the variables used in the study.
Chapter 3 is the research methodology. Research methodology describes the method used in conducting this research in details. The development of research framework proposes the relationship between dependent variable and independent variables. Next, the methodology is applied with the variable measurement, hypothesis development and analytical procedure.
According to Star Online (2010), Bursa Malaysia has publicly reprimanded LBS Bina Group Bhd for breaching the listing rules and ordered the company to carry out limited reviews on its quarterly report submission. The company had reported an unaudited profit after taxation and minority interest of RM15.42mil in Q408 compared with an audited profit after taxation and minority interest of RM21.5mil in its annual audited accounts for the financial year ended Dec31,2008(FY08).
According to Rasiah (2010), the related parties transaction (RPT) rules under the listing requirement of Bursa Malaysia have a very strong regulatory framework to maintain investor protection. The rules will make sure any RPT will give the best interest to the company and not detrimental to minatory shareholders.
Since public reprimand announcement is considered as a bad new to public, it brings harm. It is important that the investor is always up-to-date with the stock price reaction to the public reprimand announcement. This will help the firm and also investor to anticipate the losses.Besides that, it helps them to do preparation and avoid any panic when there is any emergency. With this cognition, investor become more informed and are able to make decisions regarding to their stock portfolios which are more socially efficient and market optimal ( Azzam and Karlquist, 2008).
