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Do managers learn from stock prices in emerging markets? Evidence from China

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  • Sicen Chen
  • Shuping Lin
  • Jinli Xiao
  • Pengdong Zhang

Abstract

In this study, we examine whether managers learn from stock prices when making investment decisions in the context of emerging markets. Adopting the Shanghai-Hong Kong Stock Connect scheme launched by the Chinese government as a quasi-natural experiment, we determine that openness to global investors improves the investment efficiency of firms included in the scheme. We provide supporting evidence of managers’ learning behavior proving that the effect is strengthened (weakened) for stocks whose prices convey more (less) incremental information after the scheme launched. Furthermore, we observe a more pronounced effect in firms eager to obtain the information of technology frontier and product market from foreign investors. Alternative explanations, like improving corporate governance, mitigating financial constraints, increasing executive incentives, and attracting analyst coverage are empirically excluded. Overall, this study contributes to the literature by documenting whether the information role of stock prices succeeds in improving firms’ investment efficiency in emerging markets.

Suggested Citation

  • Sicen Chen & Shuping Lin & Jinli Xiao & Pengdong Zhang, 2022. "Do managers learn from stock prices in emerging markets? Evidence from China," The European Journal of Finance, Taylor & Francis Journals, vol. 28(4-5), pages 377-396, March.
    • Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:377-396
    DOI: 10.1080/1351847X.2020.1850500
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    Cited by:

    1. Fan, Zhangmei & Chen, Ying & Mo, Yifan, 2024. "Management myopia and corporate ESG performance," International Review of Financial Analysis, Elsevier, vol. 92(C).
    2. Lin, Xiaowei & Ding, Zijun & Chen, Aihua & Shi, Huaizhi, 2022. "Internal whistleblowing and stock price crash risk," International Review of Financial Analysis, Elsevier, vol. 84(C).
    3. Zheng, Siyu & Zhang, Qihao & Zhang, Pengdong, 2023. "Can customer concentration affect corporate ESG performance?," Finance Research Letters, Elsevier, vol. 58(PB).
    4. Li, Min & Liu, Na & Kou, Aiju & Chen, Wenchuan, 2023. "Customer concentration and digital transformation," International Review of Financial Analysis, Elsevier, vol. 89(C).
    5. Long, Houyin & Wu, Zhifeng & Huang, Xiang & Wang, Jiaxin & Zhang, Qihao, 2023. "The deleveraging puzzle of investment opportunity shock: A quasi-natural experiments on drug marketing authorization holder," International Review of Financial Analysis, Elsevier, vol. 90(C).
    6. Juan J. Cortina & Maria Soledad Martinez Peria & Sergio L. Schmukler & Jasmine Xiao, 2024. "The Internationalization of China’s Equity Markets," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(2), pages 554-610, June.
    7. Kang, Haijun & Zong, Xiangyu & Wang, Jianyong & Chen, Haonan, 2023. "Binary gravity search algorithm and support vector machine for forecasting and trading stock indices," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 507-526.
    8. Hou, Fei & Li, Meina & Xu, Yang & Zhou, Song, 2023. "Signing auditors’ cultural background and client investment efficiency," Finance Research Letters, Elsevier, vol. 51(C).
    9. Zhang, Mengtao & Chen, Wenchuan & Kou, Aidi & Wu, Yanjun, 2023. "Promotion incentives, tenure uncertainty, and local government debt risk," Finance Research Letters, Elsevier, vol. 56(C).
    10. Wang, Jiaxin & Huang, Hongyan & Huang, Xiang & Sun, Di & Song, Zilong, 2024. "Returning from overseas: STEMs migration and corporate digitalization," International Review of Financial Analysis, Elsevier, vol. 91(C).
    11. Chen, Wenchuan & Xiang, Yuhan & Liu, Jin & Zhu, Yilin, 2022. "Foreign investor and industrial pollution: Evidence from sulfur dioxide emission," Finance Research Letters, Elsevier, vol. 50(C).
    12. Chen, Yuyang & Wang, Xinlu & Chen, Kun, 2023. "Stock market liberalization and pay for market-based performance: Evidence from a quasi-natural experiment in China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    13. Zhang, Jinjin & Chen, Huili & Zhang, Pengdong & Jiang, Min, 2022. "Product market competition and the value of corporate cash: An agency theory explanation," International Review of Financial Analysis, Elsevier, vol. 84(C).
    14. Pan, Di & Chen, Wenchuan & Zhang, Jinjin & Fang, Hongrui, 2023. "Government accounting supervision and excessive perk consumption of executives: Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    15. Zhang, Mengtao & Li, Wenwen & Luo, Yalin & Chen, Wenchuan, 2023. "Government audit supervision, financialization, and executives' excess perks: Evidence from Chinese state-owned enterprises," International Review of Financial Analysis, Elsevier, vol. 89(C).
    16. Huang, Dayan & Kou, Aiju & Liu, Chengyi & Liu, Shanmin, 2023. "The effect of PWS arrangements on M&A activities," Finance Research Letters, Elsevier, vol. 52(C).
    17. Zhao, Lei & Li, Na & Wu, Yanjun, 2023. "Institutional investors' site visits, information asymmetry, and investment efficiency," International Review of Financial Analysis, Elsevier, vol. 88(C).

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