Regulating Draconian Takeover Defenses with Soft Law: Empirical Evidence from Event Studies in China

Abstract

In recent years, many Chinese listed corporations have adopted draconian takeover defenses that harm shareholders’ interests. While the courts and the Chinese Securities Regulatory Commission have failed to offer any guidance as to the validity of these defenses, the two stock exchanges in China have adopted a soft-law approach to regulating them by issuing letters of concern to listed corporations. This article makes the first attempt to empirically evaluate the effectiveness of this soft-law approach by examining the effects of takeover defenses adopted under the regulation of letters of concern with event studies. The movements of stock prices during the event period suggest that the takeover defenses adopted by listed corporations under the regulation of stock exchanges were not draconian, and that these corporations were still potential takeover targets. Thus, letters of concern issued by the two stock exchanges are effective in curbing draconian takeover defenses and protecting public investors. These findings enrich our understandings of the effects of soft law and have important implications for investor protection and the development of the capital market in China.