Effects of Pilot Financial Deregulation in China: Evidence from Shanghai's Free-Trade Zone

Abstract

On September 27, 2013, the Chinese government officially launched a new free-trade zone (FTZ) in Shanghai as a laboratory for remaking the country's financial and other sectors. This paper uses the event-study methodology to investigate how the stock prices of 16 Chinese banks are affected before, at, and after the announcement of the FTZ. Our findings are as follows. First, the mean abnormal return of 16 sample banks in each of the [-1, 0] and [0, 0] windows is positive but not statistically significant. This is not consistent with our hypothesis that financial deregulation tends to increase bank value. We suggest that reform uncertainty, increased competition, and information leakage may be possible explanations. Second, in each of the [-1, 0] and [0, 0] windows, the average abnormal return of regional banks is higher than that of Big 4 banks. This is not consistent with our prediction that financial deregulation often benefits large banks more than small banks. This inconsistency may be due to the fact that regional banks are normally more innovative and have more strategic freedom. Finally, in cross-sectional analysis, we find that the total assets (size) variable has little to do with the abnormal return and that the abnormal return is inversely related to the return on equity (profitability) variable. These two results are not consistent with our hypotheses.