Corporate Governance, Enforcement and Financial Development

Corporate Governance, Enforcement and Financial Development

The Chinese Experience

Ding Chen

This important new book attempts to establish a fresh conceptual framework for the study of corporate governance by employing the new institutional economics of contract enforcement. This framework helps to clarify two critical issues including the role of law in financial development and whether there is an optimal corporate governance model that should be followed by countries attempting to develop their own stock markets.

Chapter 3: Enforcement in China’s capital market

Ding Chen

Subjects: asian studies, asian development, asian law, development studies, asian development, economics and finance, corporate governance, financial economics and regulation, institutional economics, law - academic, asian law, corporate law and governance


This chapter provides a systematic examination of enforcement in China’s stock market. It contains five sections. Section 1 looks at the self-enforcement mechanisms including hostage, collateral and hands-tying. Particular attention will be paid to the effectiveness of cross-listing. Section 2 explores the effectiveness of bilateral relationship in enforcement. It first gives a detailed examination of the function of large creditors – SCBs. Second, it looks at the function of large shareholders. Related issues such as the shareholders’ general meeting, the board of directors, board of supervisors and legal protection of minority share- holders will also be briefly examined here. Section 3 focuses on the reputation mechanism. It looks at the conditions on which the reputation mechanism functions: the incentive to build reputation, the disclosure of information and credible punishment. Section 4 moves to non-state third-party enforcement. It starts with a general discussion regarding China’s social structure which is believed to be crucial to non-state third-party enforcement. Then it explores the function of stock exchanges and investment banks in detail, and auditors and other gatekeepers briefly. Special attention is paid to the media, which has remarkably outperformed other enforcers in the past decade. Section 5 examines the role of formal enforcement. It first introduces North et al.’s (2009) new conceptual framework of state and applies it to China. It points out that formal enforcement will be inherently weak in a ‘natural state’ like China. Apart from this ultimate cause, it also examines the particular factors that affect the function of public enforcement and private enforcement of law.

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