Sunlight is the Best Disinfectant: Real-Time Comment Letters and Large M&As in China

This paper investigates how communications between regulators and firms through comment letters affect the outcomes of large mergers and acquisitions (M&As) in China. Unlike the U.S. Securities and Exchange Commission (SEC), which uses comment letters to improve the accuracy of the measurement of deals, Chinese regulators worry about controlling shareholders' self-dealing and use real-time comment letters to expose suspicious deal specifics and to create pressure for controlling shareholders to back down. I find that the Chinese stock exchanges issue more severe comment letters on deal filings that indicate controlling shareholders’ expropriation of minority shareholders. More severe comment letters are associated with a lower market response to the receipt of letters, predict a higher probability of voluntary deal cancellation by management, and indirectly increase the probability of deal withdrawal and lengthen the processing time for equity-funded deals by affecting the approving body’s scrutiny level.