Abstract
We use a policy change in the daily price limit rules in the Chinese stock market to examine the impacts of price limits on stock market reactions to corporate earnings announcements. We find that compared with the control stocks’ prices, the prices of stocks that experience a relaxation in price limits become more sensitive to corporate earnings surprises. Further analysis shows that more effective responses are likely associated with the increased trading intensity of nonretail investors and short sellers. Overall, we suggest that the relaxation of the price limit contributes to the incorporation of firm-specific information into stock prices.
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