Strong financial regulation and corporate risk-taking: Evidence from a natural experiment in China

We use the difference-in-differences (DID) method to investigate the impact of strong financial regulation on corporate risk-taking via the issue of a capital control policy. Using a natural experiment, we find that strong financial regulation reduces both agency costs and risk-averse behavior among managers, which translates into an increased willingness to engage in high-risk investments. Our results provide evidence that strong financial regulation promotes corporate risk-taking. This positive effect persists after a series of robustness tests.