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In our study, we investigate the impact of shareholders' political hierarchy on regulatory enforcement within the context of a Chinese local state-owned enterprise where multiple government shareholders, each with different political hierarchical levels, coexist. Our research reveals that the presence of higher-level noncontrolling government shareholders, specifically noncontrolling government shareholders with a higher hierarchical level than the controlling government shareholders, enhances the risk-reducing effect of derivative use. This indicates that higher-level noncontrolling government shareholders play a role in facilitating the enforcement of derivative-related regulations. Additionally, we find that these higher-level noncontrolling government shareholders enhance the efficiency of derivative use through two primary channels: their superior access to regulatory information and their monitoring of corporate regulatory compliance. We also explore the impact of higher-level noncontrolling government shareholders in regulatory enforcement by examining the 2009–2010 top-down derivative-related regulation. In summary, our analysis underscores the positive influence of higher-level noncontrolling government shareholders on risk management efficiency, primarily due to their information advantage regarding regulations, which subsequently strengthens the enforceability of regulatory measures.
Guo et al. (Fri,) studied this question.