Stock Market Liberalization and Corporate Investment Revisited: Evidence from China

66 Pages Posted: 9 Jan 2020 Last revised: 7 Dec 2023

See all articles by Zhisheng Li

Zhisheng Li

Zhongnan University of Economics and Law - School of Finance

Chun Liu

University of Toronto; Tsinghua University - School of Economics and Management

Xiaoran Ni

Xiamen University - School of Economics; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Jiaren Pang

Tsinghua University - School of Economics & Management

Date Written: February 24, 2020

Abstract

Recent reform in China has made a subset of Chinese stocks available to foreign investors, partially opening up China’s stock market. Our difference-in-differences analysis shows that this liberalization reform boosts investments in investable firms relative to noninvestable ones, with results robust to various sensitivity analyses. Besides capital inflows and risk sharing, a potential but underexplored channel is improved corporate governance due to direct and indirect pressure from foreign investors, which lowers the cost of capital and improves capital allocation efficiency. Consistent with this corporate governance channel, we find that the liberalization reform reduces investable firms’ agency costs, increases their investment efficiency and total factor productivity, and improves their operating performance. Further analysis finds that the positive investment effect from the liberalization reform is stronger among firms that were poorly governed before the reform.

Keywords: Stock Market Liberalization; Stock Connect; Corporate Investment; Corporate Governance

JEL Classification: G31; G32; G38

Suggested Citation

Li, Zhisheng and Liu, Chun and Liu, Chun and Ni, Xiaoran and Pang, Jiaren, Stock Market Liberalization and Corporate Investment Revisited: Evidence from China (February 24, 2020). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3505971 or http://dx.doi.org/10.2139/ssrn.3505971

Zhisheng Li

Zhongnan University of Economics and Law - School of Finance ( email )

WenQuan Building, 182# Nanhu Avenue
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

Chun Liu

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

Xiaoran Ni (Contact Author)

Xiamen University - School of Economics ( email )

D204
Economic Building
Xiamen, Fujian 361005
China

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

Xiamen
China

Jiaren Pang

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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