Catering Through Disclosure: Evidence from Shanghai-Hong Kong Connect

Abstract

I study firms’ use of disclosure to build investor confidence when they operate in a market where the institutions that support the supply of credible information are weak. Using the announcement of a regulation that allowed foreigners to invest in select Shanghai firms, I examine how the eligible firms responded vis-à-vis the ineligible firms. I find that the eligible firms increased private disclosures ahead of the new regime’s implementation, motivated by their desire to attract capital. Those firms experienced an increase in foreign investment after the regulation’s implementation and exhibited higher foreign holdings and lower volatility during a subsequent market crash. Taken together, the results suggest that disclosure is a mechanism by which firms use to build trust and credibility towards sophisticated investors.

Keywords: disclosure, reputation, credibility, institutional investors, market liberalization