Capital Market Liberalization Research Articles

China's Response to Capital Market Liberalization

Looking back at the Asian financial crisis of that year, although the outbreak of the crisis is closely related to the Asian countries' own inherent defects in institutional mechanisms, it is also related to the opening of the capital market, but the opening of the capital market is not an important factor that led to the financial crisis in China, so China should not close the capital market, but rather should be free to open up the scenarios, and the content of my research is to explore the Chinese response to the issue of the opening of the capital market. Through analysis, this paper argues that China cannot face the opening of the capital market overnight; it still needs to carefully consider the opening of the capital market and take many factors into account. It should be gradual rather than faster, and a more thorough opening up is better. To make a comprehensive judgment on the opening up of the capital and financial markets in the light of China's current national conditions. The following aspects should be considered: keep an eye on China's real economy situation and launch more pragmatic initiatives; strengthen the risk prevention capability; improve the various mechanisms of the capital market.

Capital market liberalization and accounting quality: Evidence from China

Introducing the Shanghai-Shenzhen-Hong Kong Stock Connects (the Connects) as an exogenous shock, we find that capital market liberalization significantly reduces real earnings management, accrual earnings management, earnings smoothing, and promotes information disclosure evaluation grades for A-share companies. Heterogeneity analysis indicates that this favorable impact is more significant for companies with poorer information environments, higher auditor reputation risks, higher corporate governance quality, and stronger executive compensation incentives. This study further contributes to the literature on the impacts of capital market liberalization on accounting quality by providing new empirical evidence from China.

How do firms react to capital market liberalization? Evidence from ESG reporting greenwashing

AbstractBased on catering theory, this study employs a difference‐in‐differences model to investigate the impact of capital market liberalization on environmental, social, and governance (ESG) reporting greenwashing using mainland Hong Kong Connection Programs as a quasinatural experiment. Our findings indicate that corporate management increasingly engages in ESG reporting greenwashing in capital market liberalization to cater to foreign investors. This conclusion remains valid after controlling for endogeneity. Mechanistic analysis indicates that investor sentiment increases with capital market liberalization. In response, corporate management intensifies ESG reporting greenwashing to cater to foreign investors, and analysts' focus does not serve as a supervisory mechanism for restraining ESG reports greenwashing. Heterogeneity tests demonstrate that ESG reports greenwashing within the capital market diminishes for mandatory disclosure and state‐owned firms. However, ESG reports greenwashing intensifies among firms facing high financing constraints amid capital market liberalization. Overall, we identify a significant catering effect on ESG reporting amid capital market liberalization, offering a novel theoretical framework on greenwashing in ESG disclosures.

Capital market liberalization and firm export performance: evidence from China’s Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programmes

ABSTRACT Using a quasi-natural experiment method, this study examines the effects of the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect (SHKS) programmes on Chinese listed firms’ export performance. We find that the SHKS positively correlates with firms’ export performance, enhances export capacity, and affects export binary margins. The SHKS influences export capacity and binary margins by improving production efficiency, promoting R&D, and easing financing constraints. Finally, the positive effects of the SHKS are particularly pronounced for state-owned enterprises (SOEs), manufacturing firms, and highly financialised firms. These findings contribute to a deeper understanding of the impact of China’s ongoing capital market liberalization on listed firms’ export performance, providing valuable insights for policymakers.

Research on the influence of capital market liberalization on the ESG performance of listed companies—A quasinatural experiment based on the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects

The Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect trading systems, which reflect important innovative policies of China’s capital market reform, have attracted significant attention from both academia and practice concerning their economic consequences. The influence of the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect systems on listed companies’ ESG performance is empirically examined by constructing a difference-in-differences model and selecting data on A-share listed companies from 2009 to 2021. It is found that the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect systems significantly promote the ESG performance of listed companies, and this conclusion holds after robustness testing. This promoting effect is more pronounced in state-owned companies, and the external legal environment is an important safeguard for the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect systems to drive improvements in listed companies’ ESG performance. An analysis of the continuity of capital market liberalization shows that the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect systems have expanded the breadth and depth of capital market liberalization following the QFII system, making the dividends from improved ESG performance more prominent. An analysis of the economic consequences shows that the liberalization of the capital market ultimately enhances corporate value by improving listed companies’ ESG performance. Based on these findings, policy recommendations are proposed for different stakeholders to promote the practical application of ESG, advocate green investment concepts, and promote high-quality, sustainable development in China’s economy.

Capital market liberalization and firms’ OFDI performance: Evidence from China

This paper examines the effect of capital market liberalization on firms’ OFDI performance. Using the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect as a quasi-natural experiment, we find that capital market liberalization significantly promotes firms’ OFDI both in probability and scale. Three plausible mechanisms are increasing TFP, easing financing constraints, and improving information disclosure quality. Furthermore, the positive effect is more prominent for international firms with overseas businesses, as well as for labor-intensive firms. Overall, our study reveals the real effects of capital market liberalization on OFDI, which has meaningful implications for emerging economies.

Indifferent to CSR performance? Market liberalization brings about changes

The relationship between stock market performance and corporate social responsibility (CSR) activities indicates the extent of acceptance by investors of such activities. Based on a sample of Chinese-listed companies and a quasi-natural experiment, we explore the impact of an important form of market liberalization—the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect—on the extent of investors' acceptance of CSR using a difference-in-differences approach. The results show that Stock Connect reinforces the favorable correlation between CSR performance and the market response to CSR reports, as well as the positive association between CSR performance and Tobin's Q. This effect is particularly pronounced for nonstate-owned enterprises,firms with lower agency costs, and firms with a lower possibility of using CSR reports for impression management. Thus, market liberalization results in the improved short- and long-term stock market performance of companies with strong CSR records. Further research shows that the benefits of the program are more prominent for companies without Qualified Foreign Institutional Investors (QFII) shareholdings, and the impact of significant foreign ownership through the Stock Connect program on the stock market performance related to CSR engagement is incremental over QFII ownership. The findings support the continuous liberalization of China's capital market.

Capital market liberalization and systemic risk of non-financial firms: Evidence from Chinese Stock Connect scheme

This paper examines the causal effect of capital market liberalization on the systemic risk of non-financial firms (NFFs), a topic that has received little attention in the literature. We exploit the launch of China's Stock Connect scheme as a quasi-natural experiment to identify the causal effect and find that capital market liberalization significantly raises the systemic risk of NFFs in China, especially for those with more concentrated supply chains and more reliance on trade credit. We explain this result by three main channels: increased market concentration, interfirm connectedness, and exposure to financial shocks. We also provide evidence that the inquiry letter and the Stock Connect Northbound Investor ID Model system, two regulatory measures implemented during the liberalization of China's capital market, mitigate the adverse effect of liberalization on the systemic risk of NFFs. Our findings offer new insight into the nexus between financial liberalization and instability and highlight the importance of strengthening regulations of capital markets to enhance the benefits of liberalization and reduce its risks for economic and financial stability.

Stock market liberalization and earnings management: Evidence from the China–Hong Kong Stock Connects

In this paper, we use the China-Hong Kong Stock Connects (the connects) as exogenous shocks of the liberalization of Chinese stock markets to examine the effects of the connects on firm earnings management. We find that the stock market liberalization of capital market significantly reduces firms’ earnings management. The decrease of asymmetric information is the underlying driving force behind our findings. Overall, this study provides policy implication that the stock market liberalization reduces the earnings management.

Returns and Investors’ Risk Perception as the Determinants of Sharia Index Integration During Covid-19

Capital market liberalization provides international diversification opportunities for investors in the capital market. However, developments in information technology that lead to the speed of information dissemination encourage capital market integration, in which a country's capital market will relate to other countries' capital markets. This study uses a quantitative approach and determines the Jakarta Islamic Index (JII) and the Dow Jones Islamic Market Index (DJIMI) as research samples. The method used is GARCH and Sobel test. The study results show that Indonesia's Islamic stock index is integrated with the global Islamic stock index. The index integration relationship is influenced by investors' risk perceptions, where investors' risk perceptions have an asymmetric negative relationship with stock index returns indicating a leverage effect. Meanwhile, investors' perceptions of risk cannot mediate the effect of returns on the integration of Islamic stock indices.

Foreign investment and information quality – A quasi-experiment from China

This study examines the effect of foreign investment on firms' information quality. We use a unique setting—the Shanghai-Hong Kong Stock Connect Program in China—that provides an exogenous shock to foreign investment and allows global investors to trade on stocks that were previously inaccessible to them. Combining a difference-in-differences model and a propensity-score matching research design, we find that information quality significantly improves in firms selected for this program, relative to other firms. The effect is more pronounced in companies without previous foreign investors and with high financing constraints, weak corporate governance, and low accounting quality, suggesting that foreign investment exerts a governing effect. Overall, our study contributes to the debate about the role of foreign investors by presenting direct evidence that foreign investment as a result of capital market liberalization plays an active role in improving corporate governance and enhancing the corporate information environment.

Does capital market liberalization promote ESG disclosure? Empirical evidence from the mainland-HK stock connect

With the growing popularity of environmental, social, and governance (ESG), ESG performance is becoming increasingly important in investors’ decisions about firms. Capital market liberalization brings in more sophisticated and mature foreign investors who are more interested in corporate ESG performance. We investigate whether capital market liberalization improves corporate ESG disclosure using Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect as exogenous shocks. By compiling a comprehensive dataset of Chinese A-share listed firms from 2006 to 2019 and manually calculating the ESG disclosure score, we find that the mainland-HK Stock Connect scheme enhances corporate ESG disclosure. This effect is heterogeneous for firms with different external environments, corporate characteristics, and environmental performance. The results suggest that the competition effect dominates the role of capital market liberalization in improving ESG disclosure of mainland listed firms and firms disclose their ESG practices to cater to the need of investors. This paper enriches the empirical research on the impact of capital market liberalization on firm behavior and performance and provides a theoretical basis for strengthening regulations in ESG information disclosure.

The impact of capital-market liberalization on audit reporting and pricing: evidence from a quasi-experiment

PurposeThe purpose of this study is to investigate the effects of capital market liberalization on audit reporting and pricing. The authors use the announcement of the Shanghai-Hong Kong Stock Connect program in China as a shock to capital market liberalization.Design/methodology/approachThe authors use the difference-in-differences method to study the difference in changes in the frequency of modified audit opinions and audit fees between the treatment group and the control group.FindingsThis study finds that capital market liberalization increases reputational and litigation risks for auditors and leads to more conservative audit reports. In addition, capital market liberalization stimulates the management of eligible firms to improve the information environment, helps to reduce information asymmetry and decreases audit fees. Specifically, the authors identify the channels of active foreign institutional investors as a new governance mechanism through which capital market liberalization impacts eligible firm and auditor decisions.Research limitations/implicationsThis study complements the literature by showing that capital market liberalization may bring a new and strong governance mechanism for eligible firms and auditors.Practical implicationsThis study may provide new references for active foreign institutional shareholders as a new and strong governance mechanism in weak institutional regimes such as China, auditors’ optimization decisions when litigation risks increase and management’s improvements in the information environment under the monitoring of foreign institutional shareholders.Originality/valueOverall, this study contributes to the literature by showing that capital market liberalization can bring a new governance mechanism for the management of eligible firms and auditors in a weak institutional environment. Foreign institutional shareholders may be superior to the domestic market forces and other corporate governance in the role of monitoring the management of eligible firms and auditors.

Capital Market Liberalization and Bank Credit Decision——Evidence from the Quasi-Natural Experiment of Chinese Mainland–Hong Kong Stock Connect

Capital Market Liberalization and Bank Credit Decision——Evidence from the Quasi-Natural Experiment of Chinese Mainland–Hong Kong Stock Connect

Can Capital Market Liberalization Attenuate Return Seasonality? A Tale of Twin Market in China

Can Capital Market Liberalization Attenuate Return Seasonality? A Tale of Twin Market in China

Risk linkages between China's stock market and APEC stock markets under China's market liberalization

This paper investigates the risk linkages between China's stock market and APEC stock markets, examine the impact of China's capital market liberalization reforms in 2014, 2016 and 2019, and identifies the contribution of driving factors to risk linkages. The empirical results show that China's capital market liberalization reforms have significantly enhanced the risk linkages between China and external stock markets, strengthened the ability of China's stock market to resist external risk shocks and enhanced the impact of risk factors on the net risk spillover of China's stock market. Additionally, the risk linkages and the contribution of driving factors are time-varying.

Capital market liberalization and opportunistic insider sales: Evidence from China

This study examines the causal effect of stock market liberalization on opportunistic insider sales. Using China’s “Shanghai/Shenzhen-Hong Kong Stock Connect” pilot programs as quasi-natural experiments, we find that liberalizing China’s equity market to foreign investors can help restrain the opportunistic selling behavior of managers by complementing traditional legal enforcement and regulation mechanisms. We further identify-two main plausible mechanisms that support our results: decreased insider trade profitability and reduction of private information accessibility. The effects of liberalization are particularly pronounced for firms with high information asymmetry and weak corporate governance, non-state-owned enterprises (non-SOEs), and those located in regions with a high marketization level. Our findings also show a similar pattern of insider purchases, which mitigates the potential concern of insider update beliefs. Overall, we highlight the market-oriented discipline role played by foreign investors and the beneficial resultant of capital market liberalization; we also provide direct implications to policy makers and other emerging countries who aim to liberalize their capital markets.

Does FinTech reduce corporate excess leverage? Evidence from China

As a financial innovation driven by digital technology, FinTech has a significant impact on the traditional financial system and the real economy. Existing studies mainly focus on the application of FinTech in the fields of banking and capital markets, less attention is paid to the firm-level evidence, especially the discussion of enterprise capital structure. In fact, when a company’s capital structure has a high proportion of debt, it is considered overleveraged, which could produce devastating impacts on the sustainable development of firms and the entire capital market. This paper explores solutions to address corporate excess leverage from the perspective of FinTech. Using Chinese listed companies from 2007 to 2020 as a sample, we find that regional FinTech significantly reduces financing constraints and improves stock liquidity, which is beneficial for the alleviation of excess leverage The results hold after a battery of robustness tests. Moreover, the heterogeneity analysis shows that this impact is more pronounced for private enterprises and companies with a relatively low degree of capital market liberalization. This study aims to provide alternative solutions to avoid excess corporate leverage in China and other emerging economies.

A north-south model of structural change and growth

This paper is motivated by a set of cross-country observations on economic growth, structural transformation, and investment rates in a large sample of countries, We observe a hump-shaped relationship between a country’s investment rate and its level of development, both within countries over time and across countries. Advanced economies reach their investment peak at a higher level of income and at an earlier point in time relative to emerging markets. We also observe the familiar patterns of structural change (a decline in the agricultural share and an increase in the services share, both relative to manufacturing). The pace of change observed in the 1930 to 1980 period in advanced economies is remarkably similar to that in emerging markets since 1960. Motivated by these facts, we develop a two-region model of the world economy that captures the dynamics of investment and structural change. The regions are isolated from each other up to the point of capital market liberalization in the early 1990s. At that point, capital flows from advanced economies to emerging markets and accelerates the process of structural change in emerging markets. Both regions gain from the liberalization of financial markets, but the majority of the gains accrue to the emerging economies. The overall magnitude of gains depends on the date of liberalization, the relative sizes of the two regions and the degree of asymmetry between the two regions at the point of liberalization. Finally, we consider the impact of a “second wave” of liberalization when China fully opens its economy to capital inflows.

Capital market liberalisation and voluntary corporate social responsibility disclosure: Evidence from a quasi‐natural experiment in China

AbstractThis paper investigates the impact of the Shanghai–Hong Kong Stock Connect (SHSC) scheme on voluntary corporate social responsibility (CSR) disclosure in China. Using a difference‐in‐differences (DiD) design, we find that companies that participate in the SHSC scheme are more inclined to voluntarily issue CSR reports. This effect is more pronounced for companies that have limited access to international markets and those with weak corporate governance. Additional analyses show that SHSC‐connected firms also produce higher quality CSR reports and achieve a better CSR performance. Our findings imply that capital market liberalisation promotes voluntary corporate disclosure for investors.