| Institution provides the rules of social operation.At the level of economic operation,institution,as the game rules or behavior constraints of different economic entities,essentially provides an important basis for economic entities to solve conflicts and reduce uncertainty.Since the report of the 19 th National Congress of the Communist Party of China clearly proposed to “Deepen the streamlining of administration and decentralization of power,and innovate the regulatory methods”,the front-line regulatory system of stock exchanges represented by the inquiry letter has gradually become the “new normal” of capital market information supervision.The inquiry letter system is implemented by the exchange that integrates market organization and self-discipline supervision.The inquiry letter of financial reports mainly inquires about the nonstandard accounting treatment,unreliable business performance,major shareholders’ fund occupation,non-standard audit reports and other issues in the financial reports of listed companies,to ensure the integrity,authenticity and reliability of information disclosure and provide a good information environment for investors and other stakeholders to make decisions.Although the inquiry letter system is consistent with the traditional Chinese governance idea of “preventing problems before they occur”and shows a trend of normalization,it is a non-punitive preventive supervision which is not compulsory.Therefore,whether this supervision mode can become an important mechanism to make up for the lack of information supervision in China’s emerging markets at this stage,and whether it can have regulatory effect on the participants in the capital market information chain and exert the regulatory effect on information disclosure are crucial issues to be explored.The capital market is an information driven market.Good information environment,high-level information participants and reliable information disclosure are important guarantees for the capital market to play its information screening function.Shannon(1948)holds that information chain is a complete process from source to destination through channel;Embedded in the process of information transmission in the capital market,it mainly corresponds to a process in which the information generator in the capital market transmits information to the receiver through an information intermediary.The information source is mainly based on the activity track of the capital of listed companies in the capital market,and forms important information through the financial department’s confirmation,measurement,recording,reporting,etc.On this basis,it is the process of being parsed by the information transmitter or directly transmitted to the information receiver in the form of reports,news bulletins,etc.In this process,the information transmission effect of participants in each link of the information chain will be affected by many factors.The existing literature has studied the level of corporate governance,external legal system,media supervision and other aspects,but little attention has been paid to the impact of non-punitive preventive regulatory system on the overall information chain transmission process of the capital market.Especially,few literature has systematically researched on the effect of the stock exchange’s front-line regulatory system from the transmission perspective of a complete information chain composed of the information generator(CFO),the information intermediary(analyst)and the information receiver(investor).Based on this,this paper is developed under information disclosure regulation theory,corporate governance theory,signaling theory,high-level echelon theory,and limited attention theory,on the basis of existing literature on the inquiry letter system and the capital market information participants.Relied on the background of China’s inquiry letter system implementation and the data of all A-share non-financial listed companies from 2015 to 2020,it studies the impact of financial report inquiry letter regulation on the main information participants’ behavior in the information chain and the effect of corporate information disclosure.It not only enriches the research on the regulatory effect of the inquiry letter system,but also helps to fully understand the specific impact and internal mechanism of the front-line regulatory system on the participants of the entire information chain,which has important practical significance and theoretical value for further improving the regulatory system and deepening the reform of the regulatory system.The findings are as follows:First,the inquiry letter supervision of the financial report has significantly improved the probability of the CFO’s resignation as the information generator.The more letters received for the previous year’s annual report or the current year’s quarterly/semiannual report,the higher the probability of the CFO’s resignation.As heterogeneity analysis finds,when the quality of corporate information disclosure is poor and the level of corporate governance is low,the problem of information asymmetry and information flaw in financial reports is more serious,and the turnover of the CFO is higher.It shows that where the queried company’s information of is less transparent and its agency problem is more serious,the CFO is faced up with greater regulatory pressure and a fragile cost-benefit equilibrium,leading to a higher probability of resignation.This result confirms the effect of regulatory inquiry on information disclosure,indicating that regulatory inquiry can serve as an indicator for the quality of corporate information disclosure and the CFO’s professional competence,where media supervision also plays a regulatory role.Furthermore,this paper finds that CFOs with weak execution ability are more affected by the financial report inquiry.The financial report inquiry letter issued by the stock exchange mainly promotes the possibility of resignation of CFOs with weak execution ability.After such a CFO leaves the company,the risk of stock price fluctuation of the company decreases significantly,specifically the risk of stock price collapse.If the successor CFO has strong execution ability,the risk of stock price collapse will decrease more significantly.Second,the inquiry letter supervision of the financial report has significantly increased the forecast error and forecast divergence in the analysts’ quantitative forecast.The more letters received for the previous year’s annual report or the current year’s quarterly report/semiannual report,the greater the forecast error and forecast divergence in the analysts’ quantitative forecast.Heterogeneity analysis presents that when the transparency of information is poor and the level of information asymmetry faced by analysts is higher,earnings forecast error and divergence are higher;When the corporate governance environment is poor,the probability of irregular corporate behavior will be higher,and the earnings forecast error and divergence degree of analysts will be higher.The above conclusion demonstrates that the regulatory inquiry can signal the existence of problems in the quality of information disclosure of companies,thereby reducing the accuracy of analysts’ prediction of such companies and improving the divergence,which confirms the information effect of the inquiry letter.Furthermore,from the perspective of analyst tracking,the inquiry letter of financial report significantly reduces the number of analyst tracking.In addition,the financial report inquiry will also affect the behavior of other information intermediaries in the capital market.For example,the inquiry letter urges the auditor of the information assurance party to increase the audit fees and increases negative reports from the information disseminator,the media.This finding further verifies that the financial report inquiry letter has the information identification function,which can affect the decisionmaking of information related parties by releasing the signal of problems in the corporate information disclosure to the market.Finally,according to the analysis of the change of the information generator,the CFO,the quality of the next analysts’ earnings forecast of the inquired company will be improved after the departure of the CFO.This result also proves that the financial report inquiry letter will affect the analysts’ forecast through the CFO personnel allocation.Third,the supervision of the financial report inquiry letter has significantly reduced the value relevance of enterprise earnings.Where the number of letters received is larger for the previous year’s annual report or the current year’s quarterly report/semiannual report,the earnings value relevance of listed companies is lower.This shows that investors’ trust in accounting information will be destroyed after the inquiry letter challenges the corporate information disclosure,which further weakens the relevance of enterprise earnings value and demonstrates the information effect of the inquiry letter system.Heterogeneity analysis shows that the effect of the financial report inquiry letter on earnings value relevance is affected by the corporate information environment and governance level.In companies with poor information disclosure quality or serious agency problems,the negative impact of regulatory inquiry on earnings value relevance is more significant,while QFII shareholding can weaken the negative impact of inquiry on earnings value relevance.It demonstrates that compared with a situation of poor internal and external corporate governance,a better internal and external governance environment can reduce investors’ doubts about accounting earnings and enable investors to make reasonable value judgments based on the information in the inquiry letter.Further,CAR value on the inquiry event date is used to test the short-term market reaction brought by the inquiry letter of the financial report.The fact that the cumulative abnormal return rate of the stock three days before and after the event date is significantly negative indicates that the inquiry letter has a risk warning effect on investors and thus confirms its information effect.Finally,based on the process of information transmission in the capital market,it is found that the departure of the information generator,the CFO,usually has a negative impact on the earnings value relevance of the current period,and the lower the earnings value relevance of the company when the analyst earnings forecast divergence is large;It shows that inquiry can affect the investors’ value judgment by influencing the behaviors of information producers and information intermediaries.The main research contributions and innovations of this paper lie in:First,it reveals the important influence and specific mechanism of the inquiry letter system on the main participants in the capital market information chain.Meanwhile,it expands the relevant literature on the consequences of the implementation of the financial report inquiry letter,providing empirical evidence for the signal effect and governance effect of non-punitive first-line supervision.The existing research on the supervision of inquiry letters mainly concerns on how inquiry supervision improves the quality of corporate information disclosure,adjusts market reaction and improve corporate behavior.However,the inquiry letter of the financial report first produces a signal effect.With the current development of China’s capital market,the impact of the signal released by the inquiry letter on the direct information participants,and the further effect on the resource allocation of the capital market remain to be further studied.On the basis of information disclosure regulation theory and signal theory,this paper deeply studies the impact of the financial report inquiry letter system on the personnel allocation of the information generator CFOs in the capital market and its corresponding economic consequences,the impact on the earnings forecast of the information transmitter analysts and its specific mechanism,as well as the impact on the earnings value judgment of the information receiver investors and the possible paths.Based on the research on each participant’s behavior towards the inquiry letter in the information transmission chain,this paper enriches relevant research on the framework for the information disclosure supervision theory and provides a theoretical basis for the implementation of the financial report inquiry letter.Second,based on the specific transmission process of the capital market information chain,combined with the information theory of Shannon(1948),this paper brings the information producer CFO,the information transmitter analyst,and the information receiver investor into a complete chain where information is transmitted from the source to the destination through the channel,and deeply studies the effect of the institutional environment on the above complete information chain.This paper employs the signal theory to study the impact of the first-line supervision of the stock exchange on the main information transmission parties in the capital market,and,combined with the information quality and governance level of listed companies.Deeply analyzes the specific mechanism of how the inquiry letter affects the information parties,which has important practical significance and reference value for the capital market on how to improve the allocation of senior executives,improve analyst earnings forecast,and make up for the crisis of investor trust.Thus,the research of this paper not only helps to deepen the cognition of the main information participants’ behavior in the capital market information chain,but also helps to provide inspiration and reference for the improvement in internal information and governance practice of companies.Third,with distinctive Chinese characteristics,as the first-line supervision implemented by the stock exchanges,the inquiry letter supervision has certain authority and effectiveness.This paper contributes not only to the exploration of the effectiveness of the exchange regulatory function,but also to the comprehensive understanding the information identification function and potential governance function of the inquiry letter,thus providing practical and theoretical support for optimizing and improving the securities supervision mechanism.China’s inquiry letter system on financial reports mainly focuses on enterprises with flaws in financial information disclosure,particularly aiming at issues such as earnings manipulation and performance fraud.On this basis,it focuses on the impact of inquiry supervision on financial reports on major participants in the information chain and its mechanism.This paper not only enriches the impact research of the inquiry on information participants in the capital market,but also expands the research on the front-line supervision effect of stock exchanges,laying the foundation for the better implementation of the inquiry letter system in China. |
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