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Depoliticization and market efficiency: Evidence from China

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  • Goodell, John W.
  • Li, Mingsheng
  • Liu, Desheng
  • Peng, Hongfeng

Abstract

We investigate changes in stock price efficiency for politically connected corporations in China. Results show that price synchronicity, an inverse measure of price efficiency, declines significantly when firms lose political connections. This effect is more pronounced for firms headquartered in areas with higher marketization. Using the release of Regulation-18 as a quasi-natural experiment, we find that post Regulation-18, synchronicity declined across firms with the effect of depoliticization becoming, 11% stronger. We identify public exposure of firm misconducts as a channel for depoliticization reducing synchronicity because firms are more likely to get publicly exposed for misconducts after depoliticization.

Suggested Citation

  • Goodell, John W. & Li, Mingsheng & Liu, Desheng & Peng, Hongfeng, 2022. "Depoliticization and market efficiency: Evidence from China," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000393
    DOI: 10.1016/j.frl.2022.102712
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    Cited by:

    1. Yan Meng & Lingyun Xiong & Lijuan Xiao & Min Bai, 2023. "The effect of overseas investors on local market efficiency: evidence from the Shanghai/Shenzhen–Hong Kong Stock Connect," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-32, December.
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    4. Huq, Tahsin Imtiazul & Hassan, M.Kabir & Houston, Reza, 2022. "The effects of firm political contributions on earmarks and subsequent firm performance," Research in International Business and Finance, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    Corporate political connection; Depoliticization; Stock price efficiency; Price synchronicity; Chinese markets;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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