The effect of stock market liberalization on corporate cash savings sensitivity: Evidence from China

Abstract

Using the launch of the Shanghai-Hong Kong Stock Connect program in China, this paper finds that stock market liberalization has a positive impact on firms’ cash savings sensitivity to stock price. The effect is robust and persistent. We propose two potential channels, promoting corporate governance and improving stock price informativeness. The relationship between the opening-up and savings-to-price sensitivity is more pronounced for firms with severer agency problems and less price informativeness. We also rule out the alternative financing channel. Our findings help to better understand how the financial market affects the real economy.