Stock Market Liberalization and Corporate Investment Revisited: Evidence from China

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: 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