Shanghai-Hong Kong Stock Connect Research Articles

Capital market liberalization and corporate environmental performance: Evidence from the Shanghai-Hong Kong Stock Connect.

The implementation of Shanghai-Hong Kong Stock Connect marks the maturity of China's capital market, and the effect of the implementation has been the focus of academic attention. Based on this quasi-natural experiment, We select 3248 samples of heavily polluting enterprises listed in China in 2010-2020 to examine the impact of capital market liberalization and on corporate environmental performance.The results show that capital market liberalization significantly improves the environmental performance of heavy polluting enterprises. The results of the heterogeneity analysis indicate that the positive effect varies across firms with different ownership and internal controls. Finally, mechanism analysis results find that capital market liberalization promotes the environmental performance of heavily polluting firms by increasing environmental assets,reducing stock price volatility,and improving the quality of information disclosure.

The impact of stock market liberalization on management forecast precision–Evidence from Mainland-Hong Kong Stock Connect Programs in China

This study examines the effects of stock market liberalization, specifically through the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect initiatives (jointly referred to as MHKSCPs), on the precision of management forecasts and the underlying mechanisms. We find that post MHKSCPs, management forecasts become less precise for bad news and more precise for good news, leading to an overall decrease in precision. The channels include litigation risk and media/analyst attention. The results are particularly pronounced in firms without foreign investors, within industries with higher proprietary costs, or in smaller firms. Moreover, there is a decrease in the information content of management forecasts, management forecast optimism, and financial report readability post MHKSCPs.

How Capital Market Liberalization Influences Stock Price Crash Risk: The Intermediate Effect of Corporate Accounting Clarity

The introduction of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs represents a pivotal juncture in the evolution of Chinas capital markets, signaling a significant move towards increased openness and integration. These initiatives have sparked considerable academic interest, underscoring their potential to transform the financial landscape. This research employs these programs as a quasi-natural experiment to investigate their profound impact on financial stability. Our analysis focuses on a comprehensive dataset encompassing A-share firms listed on both the Shanghai and Shenzhen Stock Exchanges over a thirteen-year period, from 2008 to 2021. Employing a robust difference-in-differences analytical approach, this study seeks to discern the effects of capital market liberalization on the incidence of stock price crashes. The empirical findings reveal a compelling association: greater openness in capital markets correlates significantly with a reduced risk of stock price crashes. This correlation is largely attributed to enhancements in corporate accounting transparency facilitated by these initiatives. Thus, these findings underscore the dual role of enhanced capital market openness in not only fostering stability in stock prices but also in mitigating market risks, safeguarding investor wealth, reducing systemic financial vulnerabilities, and fostering sustainable development across capital markets. This study contributes meaningfully to the existing literature on stock price crash risk by providing nuanced insights and actionable recommendations for policymakers and market participants alike, aiming to further bolster capital market openness and resilience.

Stock market liberalization and corporate environmental violations: quasi-natural experiment from stock connect in China

Purpose This paper aims to reveal the green governance role played by stock connect in transition economies from the perspective of corporates’ environmental violations and provides implications for the coordination and optimization of subsequent stock market liberalization and green transformation policies in pursuit of carbon peaking and carbon neutrality goals. Design/methodology/approach With the data of Chinese listed enterprises, this paper takes the Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect in China as a quasi-natural experiment and applies the multi-period difference-in-difference (DID) model to identify the impact of stock market liberalization on the corporates’ environmental violations. Findings The findings reveal that the stock market liberalization significantly restrains the corporates’ environmental violations. These findings are robust to a series of sensitivity tests, including excluding two-way effects, adjusting the year of policy implementation, replacing the core variables, introducing the regional fixed effects and excluding the interference effect of other relevant policies during the sample period. Furthermore, the stock market liberalization is beneficial for upgrading information disclosure quality, improving internal governance capability, strengthening environmental protection incentives, and thus restrains corporates’ environmental violations. Meanwhile, heterogeneity tests show that the inhibitory effects are more significant in those grouped samples which is large scale, state-owned nature, located in eastern region, with poor evaluation performances and heavy tax burden. Originality/value We make two marginal contributions to the current literature. First, this paper enriches the literature on the factors influencing corporate environmental violations by focusing on how the macro-level financial policy influences the micro-level corporate environmental violations. One the one hand, prior studies mainly focused on the consequences of corporate environmental violations; however, there is still a puzzle that the effect of stock market liberalization cannot be fully justified to influence corporate environmental violations. The findings help explain this puzzle by examining that stock market liberalization can restrain corporate environmental violations. Moreover, prior studies mainly focused on corporate share price (Yunsen Chen et al., 2022), market liquidity (Han Kim and Singal, 2000), information disclosure (Liang, Lin, and Chin 2012), corporate governance (Bae and Goyal, 2010) and corporate violations (Lingyun Xiong et al., 2021), but not on corporate environmental violations. We assume that the suppression effect of stock market liberalization on corporate environmental violations can help reduce corporate environmental violations, improve corporates’ awareness of environmental compliance. Second, this paper contributes to a better understanding of the literature on stock market liberalization by investigating the restraining effect of Stock Connect on corporate environmental violations from the perspective of information channel, corporate governance channel and motivation channel, which is of practical significance. Moreover, we investigate the differences in the inhibitory effects of stock market liberalization on different enterprises' environmental violations, from firm size, property rights, enterprise assessment results, tax burden to geographical location, which is conducive to the construction of a green financial system and the promotion of sustainable economic development. Our results show that firms which are large scale, state-owned nature, located in eastern region, with poor evaluation performances and heavy tax burden tend to compliance with environmental laws. These findings emphasize the importance and benefits of Stock Connect.

Learning ESG from stock prices: Evidence from a quasi‐natural experiment in China

AbstractThis study examines the impact of stock market liberalisation on managerial environmental, social and governance (ESG) learning from stock prices. Using a quasi‐natural experiment, specifically the Shanghai‐Hong Kong Stock Connect (SHHKC) and Shenzhen‐Hong Kong Stock Connect (SZHKC), we find that stock market liberalisation enhances firms' ESG expenditure sensitivity to stock prices, implying that managers extract greater amounts of ESG information from stock prices. Additionally, the mechanism test shows that liberalisation influences managerial learning by enabling stock prices to incorporate foreign investors' private ESG information at both aggregated and granular levels. Moreover, we demonstrate the specific ESG information that managers acquire from stock prices. We also find that the learning effects are stronger for firms in polluting industries, without ESG‐proficient managers, and without access to alternative learning channels, lending further support to managerial ESG learning from stock prices. Finally, we demonstrate that the increase in ESG expenditure leads to subsequent ESG performance improvement. Our findings provide the managerial implication that managers under transformation pressure may seek information from ESG‐related stock price reactions.

Does stock market liberalization increase company TFP? Evidence from the Shanghai-Shenzhen-Hong Kong stock connect program in China

This paper studies the impact of the liberalization of the Chinese stock market on company total factor productivity (TFP) and its mechanism of action by using the "Shanghai-Hong Kong Stock Connect" program. The benchmark regression results based on the multi-period difference-in-difference (DID) model show that the implementation of the “Shanghai-Hong Kong Stock Connect” program significantly increases the TFP of target companies, a conclusion that is still valid after a series of robustness tests. Further mechanism analyses shows that the program increases company TFP by both increasing a company's stock liquidity and information transparency and reducing the degree of financing constraints.

Environmental effects of foreign indirect investment: The information channel

We investigate the environmental consequences of foreign indirect investment in China. By exploring the implementation of the Shanghai-Hong Kong Stock Connect program, which induced a positive shock to foreign indirect investment, we find that connected firms reduced their commitment to environmental responsibility more than unconnected firms. We document evidence that this can be attributed to the switch from accrual-based earnings management to real earnings management when the information environment improves after the shock. This effect is more pronounced for firms that face weak environmental regulation and low social norm costs, which amplify the unintended consequences of the information channel of stock market liberalization in developing countries.

The Impact of Capital Market Opening on Enterprise Green Technology Innovation: Insights from the Shanghai–Hong Kong Stock Connect

China’s economy has experienced a period of remarkable growth and entered a stage of high-quality development, necessitating the implementation of innovative eco-friendly practices involving green technology innovation. The capital market environment plays a direct role in influencing the sources and scale of external financing for businesses, thus affecting their green technology innovation activities. The Shanghai–Hong Kong Stock Connect (SHSC) mechanism in China is the first official two-way opening of China’s capital market. Therefore, this paper regards the SHSC policy as a quasi-natural experiment platform for the opening of the capital market and employs a difference-in-difference methodology to investigate the impact of the SHSC policy on enterprise green technology innovation and its influence mechanisms. The overall sample covers Chinese A-share listed enterprises from 2012 to 2017. The findings demonstrate that the SHSC policy significantly enhances the level of green technology innovation by enhancing corporate governance and alleviating financing constraints. Non-state-owned enterprises are more affected than state-owned ones, and there is no significant difference in the impact between heavily polluting industries and non-heavily polluting ones.

The Influence of Stock Market Liberalization on Corporate ESG Performance: Evidence from “Shanghai-Hong Kong Stock Connect”

The Influence of Stock Market Liberalization on Corporate ESG Performance: Evidence from “Shanghai-Hong Kong Stock Connect”

The impact of stock liquidity on corporate environmental information disclosure: Does climate risk matter?

<p>From the perspective of the Chinese market microstructure, we took Chinese A-share listed companies as samples to explore the impact and mechanism of stock liquidity on the quality of corporate environmental information disclosure (EID). Our results indicated that stock liquidity has a positive impact on the quality of corporate EID. Using the stock market interconnection events of the 2014 Shanghai-Hong Kong Stock Connect and the 2016 Shenzhen-Hong Kong Stock Connect as a quasi-natural experiment and applying the Ⅳ approach, the research results remained robust after controlling for endogeneity issues. Moreover, both climate physical risk and climate transition risk positively regulated the relationship between stock liquidity and the quality of corporate EID. Further analysis revealed that the positive impact of stock liquidity on the quality of corporate EID is determined by the information effect path and governance effect path of stock liquidity, and the role of the information effect path is more important. In summary, stock liquidity has had an important feedback effect on Chinese companies' active EID behavior through two pathways: Information effect and governance effect.</p>

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.

The informational role of analyst coverage on firm innovation: evidence from China

ABSTRACT We examine the effect of financial analysts’ informational and monitoring roles on firm innovation in the developing Chinese market. The findings demonstrate that analyst coverage has a positive influence on the number of corporate patent and invention applications. Causality is established by using an instrumental variable, and is reinforced by implementing a regression-discontinuity design (RDD) based on index reconstitutions and a difference-in-difference (DiD) analysis using the Shanghai-Hong Kong Stock Connect program as a plausible exogenous shock. Further, the positive effects are more pronounced for firms with severer financial constraints, higher information asymmetry, lower tolerance for failure among investors, and lower institutional ownership. These findings indicate that the informational role of financial analysts is more salient than their monitoring role in the context of developing markets.

Does equity market openness increase productivity? the dual effects of Shanghai-Hong Kong stock Connect program in China

This study investigates the dual effects of equity market openness on aggregate total factor productivity (TFP) growth and finds that gains in aggregate TFP can be driven by within-firm and reallocation effects across firms. Using a quasi-natural experiment based on China’s Shanghai-Hong Kong Stock Connect program, we find that equity market openness has a positive effect on firms’ TFP. Stock price efficiency is the mechanism underlying this improvement. Equity market openness reduces firms’ stock mispricing and improves corporate governance and investment efficiency through the feedback effect, thereby increasing TFP. Finally, we argue that equity market openness induces significant growth in capital stock and employment among high-TFP firms, driving them to achieve rapid growth and greater market share. The reallocation effect of equity market openness translates into aggregate productivity gains. This empirical study considers stock pricing as a mechanism to shed light on the dual effect of equity market openness on TFP growth.

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

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.

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.

Stock Market Liberalization and Earnings Management

Using the Shanghai-Hong Kong Stock Connect (SHHKConnect) as an exogenous shock, this paper investigates the impact of stock market liberalization on earnings management in China. By employing the propensity score matching difference-in-difference (PSM-DID) method, we find that the implementation of the SHHKConnect could lower the extent of earnings management for connected firms. The robustness check is conducted and valid. Our study contributes to a deeper understanding of the economic consequences of stock market liberalization and thereby providing implications for policymakers.

Impact of capital market openness on corporate green technology innovation: evidence from the Shanghai-Hong Kong Stock Connect program

This paper explores the impact of capital market openness on corporate green technology innovation using the Difference in Differences model (DID) and a quasi-natural experiment with the Shanghai-Hong Kong Stock Exchange using A-share listed corporations data from 2011 to 2020. The findings indicate that capital market openness has a significant promotion effect on corporate green technology innovation. This effect is consistent using Propensity Score Matching-Difference in Differences model (PSM-DID), counterfactual and placebo tests. Moreover, capital market openness can indirectly stimulate corporate green technology innovation by increasing corporate R&D investment and improving corporate management. Notably, the promotion effect of capital market openness on green technology innovation of SOEs and small-scale corporations is stronger.

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.

Financial openness and profitability premium: Causal evidence from the Shanghai‐Hong Kong Stock Connect

AbstractThis study explores the impact of capital market openness on the profitability premium by using the Shanghai‐Hong Kong Stock Connect (SHKSC) programme as an exogenous shock. The empirical results show that (1) we can basically rule out the mispricing mechanism driving the significant profitability premium in China; (2) following SHKSC, the expected stock returns increase more across less profitable firms, and the less profitable firms have more increases in illiquidity, capital structure and information disclosure quality; and (3) the results are still robust after using propensity score matching analysis, deleting the highly volatile periods and conducting a firm‐level test with the triple‐differencing design.