On January 1, 2010, the Shenzhen Stock Exchange (SZSE) in China launched an online interactive platform named “Hudongyi.” This platform enables individual investors to communicate directly with executives of firms listed on the SZSE, under the supervision of the SZSE, thereby providing a quasi-natural experiment to study the impact of individual investors on corporate governance. Employing a difference-in-differences design, we document that the investor-firm interactions on Hudongyi deter real earnings management by firms listed on the SZSE through reducing information asymmetry and raising reputational costs. This effect varies with posting specificity, interaction effectiveness, and firm features. These findings suggest that individual investors can effectively engage in corporate governance when their right to speak up is facilitated by proper technology and regulatory scrutiny.

Regulatory economics suggests that one benefit of public enforcement is the deterrence of improper conduct. Using a difference-in-differences (DiD) design, we investigate whether a deterrence effect follows the revelation of Public Company Accounting Oversight Board (PCAOB) enforcement. We find that large audit firm offices improve audit quality following enforcement naming another office within their firm while small firm offices improve following enforcement of local small firm competitors, with these responses varying by enforcement type. To understand potential mechanisms for the geographic deterrence effect, we examine the first occurrence of a revoked PCAOB registration within a market and find that results are stronger if there is greater news coverage or if nonsanctioned firms are in closer proximity to the sanctioned auditor. Supplemental tests reveal that results are stronger when nonsanctioned auditor clients are similar to the sanctioned firm’s clientele. Our findings suggest a positive but varied deterrence effect following PCAOB enforcement.