The Real Effect of the Investor State: Evidence From China's Belt and Road Initiative

China has been experimenting with a shift toward being an “investor state,” yet little research has examined the real effect of this transition. Using China's Belt and Road Initiative (BRI), an exemplary event reflecting China's investor state experiment, we investigate how BRI affects market efficiency in terms of “revelatory price efficiency” (RPE), which could improve corporate investment efficiency and thereby have real effects on economic growth. Although the Chinese government views BRI highly, we find robust evidence showing that BRI negatively affects market efficiency in RPE, indicating an impairment to China's long‐term economic growth. Our analysis reveals that BRI affects RPE through increased policy uncertainty and shifts in the investor base, both in turn affect information acquisition by managers of the BRI‐affected firms. The negative effect of BRI on RPE is attenuated when the institutional features allow for greater private information acquisition. Our evidence sheds light on the determinants of RPE in a transition economy and contributes to the broader discussions of the so‐called “China puzzle.”