This study examines how limits of arbitrage can affect the pricing of idiosyncratic volatility. Using both unique trading constraints in the Chinese stock market and other commonly-used limits-of-arbitrage measures, we construct a comprehensive limits-of-arbitrage index. Based on this index, we find that the negative idiosyncratic volatility return premium is much stronger and more persistent in stocks with high limits of arbitrage. Furthermore, the existing explanations about the idiosyncratic volatility return premium cannot fully explain what we find about the role of limits of arbitrage in the pricing of idiosyncratic volatility in the Chinese stock market. Our study suggests that the trading constraints introduced in the name of protecting individual investors can actually hurt them, since these additional limits of arbitrage will increase the inefficiency of the security market.

Regulatory and technological (RegTech) developments have been changing the nature of financial markets in recent decades. This paper documents the real effects of RegTech in the market of corporate control. Exploiting the staggered implementation of the EDGAR system from 1993 to 1996 as quasi-exogenous RegTech shocks, we find that RegTech developments reduce firm acquisitiveness, especially for growth firms, solo-bidder deals, and stock-based acquisitions. Our main findings still hold when employing the stack-cohort approach to address concerns regarding biased staggered DiD estimators. In addition, EDGAR implementation discourages informed trading and lowers the acquirers' announcement returns. Overall, our deal-level analyses show how RegTech development matters for firm investment decisions with more granularities. Our paper differs from but complements recent empirical evidence that EDGAR implementation increases the level of overall investment, suggesting that dampened managerial learning induces firms to switch from highly risky and uncertain projects (M&As) to routine projects with less uncertainty (capital expenditures).

In this study of private placement of public equity (PEP) in China, we examine post-placement stock performance and the possible bases for regulatory approval for PEP applications. We find that firms receiving approvals for PEP issues are financially stronger than those rejected by regulatory authorities and experience significant positive long-term abnormal returns following the placements. These long-term abnormal returns are higher when controlling shareholders participate in the placements and when the capital raised is allocated to asset restructuring or M&As. The evidence supports the view that the government offers a “helping hand” by screening PEP applications and approving those with promising investments and capable investors. Investor overoptimism about investment opportunities at firms that issue equity privately is constrained because PEP participants can effectively monitor and discipline management and help improve investment efficiency over time.