Economic consequences of administrative penalties on violations by IPO sponsor representatives

Abstract

It is a crucial issue in the theory and practice of securities regulation, to improve regulation of securities institutions and avoid securities fraud. Using IPO sponsor supervision data by the China Securities Regulatory Commission (CSRC) for the period 2004 to 2015, we analyse the economic consequences of administrative penalty on the sponsor representative level. We find that violating sponsor representatives undertake fewer IPO projects, receive IPO projects of a smaller size and receive lower issuing fees after a penalty from the CSRC, compared with other sponsor representatives. Meanwhile, we also find that violating sponsor representatives significantly improve the quality of IPO projects undertaken after a penalty, which is reflected in lower earnings management and higher profitability of these IPO projects. Our results indicate that an administrative penalty can not only effectively punish the violations, which affects sponsor representatives’ income as a result, but also significantly improves the competence of violating sponsor representatives. Our research has confirmed the effectiveness of an administrative penalty and is helpful in further improving financial regulatory enforcement and related systems.