We examine the effects of implementing a U.S. approach to the enforcement of mandatory disclosure in China. Using a hand-collected sample of comment letters (CLs) issued by the Shanghai Stock Exchange over the period of 2013 to 2018, we show that stock price reactions to CL receipts and replies are negative and significant. Using textual analysis to match issues raised by regulators to targeted firms’ changes in disclosure, we show that these firms do address CL issues point by point, but do not experience significant improvements in their information environments. Our article highlights the importance of incentives rather than regulation/enforcement in reducing information asymmetry.

We develop a continuous-time asset allocation model to investigate the effects of mean-reverting stock returns on investors with Prospect Theory (PT) preferences. Our semi-analytical solution facilitates a comprehensive exploration of how the stock investment of PT investors may differ when accounting for mean reversion. We find that incorporating mean reversion attenuates the distinct V-shaped demand pattern in relation to contemporaneous prices, which is more pronounced when mean reversion is absent, by significantly reducing PT investors’ stock demand following price increases. This shift leads to a stock demand profile that demonstrates an inverse relationship with stock prices. In line with this change, we also show that combining PT utility with mean reversion predicts short-term contrarian behavior and the disposition effect more reliably than benchmark models that incorporate either PT utility or mean-reverting returns alone.