Shanghai-Hong Kong Stock Connect Research Articles

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.

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.

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.

Capital market opening and corporate environmental performance: Empirical evidence from China

This study investigates the impact of capital market opening on corporate environmental performance (CEP), using Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect as quasi-natural experiments. We find that capital market opening can improve CEP, and our conclusion is robust after a placebo test and a series of robustness tests are conducted. Further investigations show that the opening policy loosens corporate financing constraints and promotes corporate green innovations. We also explore the motivation of this relationship: the improvement of CEP after the opening of the capital market is accompanied by increases in corporate value.

Who benefits more? Shanghai-Hong Kong stock Connect—“Through Train”

This study investigates the impact of the introduction of the Shanghai-Hong Kong Stock Connect (SHSC) program on the market quality in the Shanghai A-shares and Hong Kong Main Board shares markets. This study employs the difference-in-difference (DID) approach to examine whether the market quality of constituent stocks increases relative to that of non-constituent stocks after the launch of the new SHSC program. Surprisingly, we find that market quality, as reflected by the market illiquidity and market volatility measures of constituent stocks, is worse than that of non-constituent stocks after the launch of the SHSC program in the Shanghai A-shares market. However, the differences in market quality between constituent and non-constituent stocks gradually diminish over time. In contrast, no significant market quality effects generally occur in the Hong Kong Main Board shares market. We support this interesting finding by showing that different herding behavior exists in the two connected stock markets after implementation of the new program. Namely, the herding behavior of constituent stocks is more severe than that of non-constituent stocks in the Shanghai A-shares market but no apparent herding effects exist in the Hong Kong Main Board shares market.

Capital market opening and labour investment efficiency

The purpose of this research is to explore the impact of capital market opening on inefficient labour investment of enterprises and its impact path. This paper takes 2010–2019 A-share non-financial listed companies in Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) as research objects and samples, and uses DID method to examine the impact of capital market opening on labour investment efficiency of listed companies.We collected 22567 pieces of data.The results show that the capital market opening system significantly reduces inefficient labour investment of enterprises, mainly through reducing the information asymmetry and the agency costs as the main paths. This research shows that the capital market opening is of positive significance to the sustainable development of enterprises, and it proposes targeted suggestions for the government, listed companies and market investors to effectively reduce the inefficient labour investment of enterprises. The research provides more feasible references for capital market opening and corporate governance, and also offers theoretical evidence for the implementation of ‘Shanghai-Hong Kong Stock Connect’ program.

Capital market opening and stock price crash risk – Evidence from the Shanghai-Hong Kong stock connect and the Shenzhen-Hong Kong stock connect

The capital market opening policies of Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect offer international investors an approach to investing directly in Mainland China stock markets. In this paper, we investigate the impact of the capital market opening policies on the stock price crash risk in China. With a dynamic difference-in-difference (DID) model, we find that capital market opening policies significantly reduce the stock price crash risk with a dynamic difference-in-difference (DID) model. Also, we study the influence mechanism of the capital market opening to reduce the stock price crash risk. We find that the capital market opening policies reduce the stock price crash risk by improving corporate governance and increasing information transparency. Furthermore, we find that the effect of the capital market opening policies is more pronounced among state-owned companies and high-tech industries.

Capital Market Opening and Enterprise Risk Taking

The level of risk-taking can affect the investment choices and market value of enterprises. The opening of the capital market can improve the company's information environment, optimize the company's governance structure, and then play an important role in the level of risk-taking of enterprises. Therefore, from the perspective of financing constraints, in the context of "Shanghai-Hong Kong Stock Connect", this paper explores the impact of capital market opening on corporate risk-taking. Theoretical research has found that "Shanghai-Hong Kong Stock Connect" can help alleviate financing constraints and improve the risk-taking level of enterprises. Therefore, the implementation of a higher level of opening up of the capital market in the future will help listed companies take appropriate risks and promote the improvement of corporate value.

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.

Risk Analysis of A-H Share Connect Market Based on Deep Learning and BP Neural Network

China's Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs make it possible for investors to trade stocks within specified limits through the two stock exchanges. The A-H share exchange stock market is crucial to the opening of the Mainland market, but few studies have paid attention to the market risks of such stocks. Using deep learning and BP neural network algorithm, this study constructs a three-dimensional A-H share interconnection market risk prediction index system including stock price fundamental indicators, technical indicators, and macro indicators based on the CES300 Index. Taking the CES300 Index return as the output layer indicator, a BP neural network with a 21-10-1 structure is constructed, and the tan-sigmoid transfer function and the LM optimization algorithm training function are used for network training to predict the return of the A-H share interconnected stock market. The mean square error (MSE) converges to 10−6, and the goodness of fit R reaches 0.9928 and validates the prediction accuracy of the BP neural network model. It provides an efficient and accurate risk prediction model for the A-H share interconnected market, which facilitates the interactive development of the Mainland and Hong Kong markets.

Capital Market Opening and ESG Performance

ABSTRACT This research uses a quasi-natural experiment of the Shanghai-Hong Kong Stock Connect trading system and takes 2011–2019 A-share listed companies as the sample to construct a DID model that empirically proves the improvement effect of capital market opening on corporate ESG performance through external monitoring mechanisms. This effect is also heterogeneous due to firm characteristics. This study presents the Shanghai-Hong Kong Stock Connect trading system as a breakthrough, reveals the mechanism of capital market opening on ESG, and provides new empirical evidence for the study of micro-firm behavior.

Do foreign investors crowd out sell‐side analysts? Evidence from China

AbstractThis paper examines whether foreign investors (FIs) affect the information production of analysts. Based on China's stock market, we find that FIs significantly reduce analysts’ coverage. Such negative association is more pronounced in firms with a high level of governance and information disclosure and varies with analyst characteristics. We also identify two possible economic mechanisms: the information channel and the governance channel. Further tests suggest that as FIs crowd out analysts, the number of research reports and brokerage site visits decreased, but analyst forecast accuracy improved, indicating that the demand and supply of information are generally in equilibrium. We further address the endogeneity issue using a change‐on‐change analysis and a quasi‐natural experiment, the Shanghai–Hong Kong Stock Connect (S‐HKSC), and the results still hold. Overall, our results present evidence of potential information production by FIs, providing policy implications and highlighting the positive effect of China's open‐door policy in capital markets.