Can comment letters impact excess perks? Evidence from China

This paper investigates the impact of a global emerging governance tool, the comment letter, on firms' excess perks in China. We find that excess perks are significantly lower when the firms receive a perks-related comment letter. The results hold after a series of robust tests, including a difference-in-differences design. Moreover, cross-sectional tests show that the governance effect of perks-related comment letters on excess perks is attenuated in state-owned and politically connected firms, as these firms are more likely to capture regulators. Further testing shows that the regulatory effects of perks-related comment letters on excess perks are amplified by independent auditor scrutiny and media regulatory pressure; furthermore, their impact is more pronounced at companies with higher management agency costs. In addition, when the content of comment letters is of higher severity and the reply letters are more detailed, perks-related comment letters play a stronger governance role on excess perks. Finally, there is evidence that comment letters have a spillover effect on the excess perks of peer firms in the same industry and the same regions that do not receive such comment letters, revealing the indirect effect of regulatory scrutiny on excess perks. Our results prove that comment letters can effectively regulate firms' excess perks and that institutional factors greatly influence their regulatory effectiveness.