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Valuing reform: How China's stock connect programs correct firm mispricing

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  • Shan, Yimin
  • Chen, Yang

Abstract

This paper investigates the impact of equity market liberalization on firm-level misvaluation using the staggered implementation of China's Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs as a quasi-natural experiment. Drawing on a difference-in-differences framework and two complementary misvaluation measures, we find that market access reforms reduce pricing deviations from firm fundamentals. This effect is primarily driven by a correction of undervaluation, particularly among private firms and smaller enterprises. Further analyses suggest that reduced information asymmetry—reflected in improved market liquidity and strengthened corporate governance—plays a central role in these valuation adjustments. Additionally, post-reform improvements in investor sentiment are associated with the reversal of undervaluation. Our findings provide new evidence on the firm-level efficiency gains from capital market opening in China and underscore the importance of institutional features in shaping the benefits of financial liberalization.

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  • Shan, Yimin & Chen, Yang, 2025. "Valuing reform: How China's stock connect programs correct firm mispricing," China Economic Review, Elsevier, vol. 94(PA).
    • Handle: RePEc:eee:chieco:v:94:y:2025:i:pa:s1043951x25001762
    DOI: 10.1016/j.chieco.2025.102518
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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