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The effect of overseas investors on local market efficiency: evidence from the Shanghai/Shenzhen–Hong Kong Stock Connect

Author

Listed:
  • Yan Meng

    (Inner Mongolia University)

  • Lingyun Xiong

    (Jiangxi University of Finance and Economics)

  • Lijuan Xiao

    (Jiangxi University of Finance and Economics)

  • Min Bai

    (University of Waikato)

Abstract

Using a recent stock market liberalization reform policy in China—the Stock Connect—as a quasi-natural experiment, this study examines the effect of stock market liberalization on market efficiency. Employing a dataset of 17,086 Chinese listed firms covering 2009 to 2018, we find that stock market liberalization improves the market efficiency of the Chinese mainland stock market. We further explore the potential channels through which the Stock Connect can enhance the efficiency of the A-share (A-shares refer to shares issued by Chinese companies incorporated in mainland China, traded in the Shanghai Stock Exchange and the Shenzhen Stock Exchange. They are denominated in Chinese RMB (the local currency). A-shares were restricted to local Chinese investors before 2003, are open to foreign investors via the Qualified Foreign Institutional Investor, RMB Qualified Foreign Institutional Investor, or the Stock Connect programs.) market. The findings show that liberalizing capital markets could benefit local market efficiency by increasing stock price informational efficiency and improving corporate governance quality. The additional analysis shows that stock market liberalization has a significant and positive impact on local market efficiency, enhancing firm value and reducing stock crash risk. We conduct various robustness checks to corroborate our findings. This study provides important policy implications for emerging countries liberalizing capital markets for foreign investors.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:fininn:v:9:y:2023:i:1:d:10.1186_s40854-022-00429-3
    DOI: 10.1186/s40854-022-00429-3
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    More about this item

    Keywords

    Market efficiency; Stock Connect; Market liberalization; Overseas investors;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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