The Governance Effect of Financial Reporting Inquiry Letters on Major Shareholder Expropriation: Evidence From Chinese Listed Companies

Abstract

Utilizing Chinese A-share listed companies from 2015 to 2023 as samples, this article empirically tests the influence of financial reporting inquiry letters on major shareholder expropriation and its function mechanism and obtains the following four conclusions. First, financial reporting inquiry letters exert a temporary restraining effect on major shareholder expropriation, necessitating continuous issuance of letters by stock exchanges to reinforce this governance role. Second, the internal and external environment influences the governance effectiveness of financial reporting inquiry letters. The inhibitory effect of financial reporting inquiry letters on major shareholder expropriation is more pronounced for companies without relaxing short-selling controls, with higher marketization degrees, and with weaker exit threats from non-controlling large shareholders. Third, financial reporting inquiry letters can attract investor attention and increase litigation risk, thereby curbing major shareholder expropriation. Fourth, financial reporting inquiry letters have a deterrent effect on major shareholder expropriation in peer companies that have not gotten letters, but they cannot effectively impact companies in the same region that have not received letters. This article confirms the inhibitive influence of non-punitive supervision on major shareholder expropriation, providing empirical evidence regarding the governance of Type II agency issues in Chinese listed companies.