The gatekeeping role of regulators and intermediaries: Evidence from regulatory reforms in China's IPO market

In general, the role of regulators and third parties as gatekeepers is ambiguous. Some scholars argue that government intervention can cause resource misallocations, while others point out that in immature markets, intermediaries are inadequate and regulators can help manage market failures. To empirically examine this question, this study focus on regulatory reforms in the information disclosure of initial public offering (IPO) firms in China. Using a difference-in-differences approach, we find that enhanced supervision from regulators results in a significant decrease in IPO firms’ earnings management. The costs for issuers and engagement risks for intermediaries influence the policy effect. Firms in less-marketized areas improve more after the reforms. The implication of the findings is that under a weak institutional environment, regulators can help ameliorate the failures of third-party intermediaries and serve as principal gatekeepers.