AFTER×SOLVED_CSRC in Table 4 is driven by AFTER×SOLVED_CSRC2 (shareholders’ meeting), AFTER×SOLVED_CSRC4 (management’s responsibilities), and AFTER×SOLVED_CSRC8 (miscellaneous governance problems). Because we use both OROA and Tobin’s Q to proxy for net shareholder value, we examine the regression results of both OROA and Tobin’s Q to draw inferences. We find no consistent evidence across the two regressions that correcting any individual categories of corporate governance noncompliance problems improves shareholder value. Specifically, the coefficient on AFTER×SOLVED_SELF8 (the miscellaneous category) is significantly positive for the OROA regression but insignificant for the Tobin’s Q regression. Likewise, the coefficient on AFTER×SOLVED_CSRC2 (shareholders’ meeting) is not significant for the OROA regression but significantly positive for the Tobin’s Q regression. We also find no consistent evidence suggesting that correcting any individual categories of corporate governance problems reduces shareholder value. Specifically, the coefficients on AFTER×SOLVED_SELF6 (management’s compensation and accountability), AFTER×SOLVED_CSRC7 (corporate disclosure), and AFTER×SOLVED_SELF8 (the miscellaneous category) are significant in either the OROA regression or the Tobin’s Q regression but not both. Interestingly, the coefficients on AFTER×UNSOLVED_SELFi (i=6 for management’s compensation and accountability, 7 for corporate disclosure, and 8 for the miscellaneous category) are significantly negative in the Tobin’s Q regression. Taken at face value, these coefficients suggest that the listed firms’ self-reported corporate governance problems related to these three categories are new to the stock market and thus result in a significant reduction in Tobin’s Q after the revelation of these uncorrected problems. However, we caution the reader to interpret these coefficients with caution because the majority values of UNSOLVED_SELF are zero.
6. Conclusion A widely held view in the finance literature is that investor protection in general and law enforcement in particular are vital for corporate financing, financial market development and economic growth. However, the extant literature disagrees on the optimal approaches to law enforcement. La Porta et al. (2006) concludes public enforcement does not work and advocate the adoption of private enforcement while Jackson and Roe (2009) support public enforcement. The objective of this study is to use a natural experiment from China to directly test whether public enforcement matters in improving investor protection for firms domiciled in weak investor protection countries. Specifically, in March 2007 the China Securities Regulatory Commission (CSRC) conducted a one-time Special Public Enforcement Activity on listed firms’ compliance with several important corporate governance regulations issued over the period 2002-2006. We find that the Special Public Enforcement Activity forced our sample firms of 1,094 unique listed firms to disclose more than 10,000 corporate governance noncompliance problems. The most common problems relate to the board of directors and internal control. More importantly, we find that the affected firms claimed to have corrected more than 90% of the disclosed problems by the end of the Special Public Enforcement Activity in late 2008. Based on this evidence, the 2007 Special Public Enforcement Activity is a success. However, we find little evidence that correcting the identified corporate governance problems resulted in a significant increase in shareholder value measured by both operating accounting performance and Tobin’s Q. We also study the effect of the 2007 public enforcement on two important specific outcomes frequently considered in prior literature: controlling shareholders’ tunneling via inter-corporate loans (Jiang et al. 2010) and earnings quality. We find little evidence that the 2007 public enforcement helps reduce tunneling or