Unintended effects of random supervision: evidence from CSRC’s random inspection

We examine whether investors price firms’ selection for random inspections by the China Securities Regulatory Commission (CSRC), even though inspection targets are randomly drawn rather than chosen because of suspected misconduct. Using a staggered difference-in-differences design, we find that the implied cost of equity increases after random inspection. The increase is larger for firms subsequently sanctioned and weaker among firms with stronger internal governance or external monitoring. Inspection is also followed by more negative investor-forum discussion, wider bid-ask spreads, and greater downward accrual-based earnings management, consistent with heightened perceived risk and reporting responses. The effect dissipates after events that reduce uncertainty or restore credibility, while inspected firms experience lower longer-horizon buy-and-hold abnormal returns. These findings show that investors price selection for regulatory scrutiny even under random assignment and identify an unintended financing cost of random supervision.