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Litigation access and market efficiency: Evidence from China’s filing registration reform

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  • Zhao, Guodong
  • Jiang, Yu
  • Lei, Xue

Abstract

Accurate stock pricing is fundamental to capital market efficiency; however, the effect of legal institutional changes on valuation remains unclear. China’s filing registration reform simplified the securities litigation procedure without changing substantive laws; this introduced exogenous variations, allowing researchers to examine this relationship. Using difference-in-differences analysis across firm-year observations from China, we find that firms with higher prereform litigation exposure experienced significantly greater improvements in stock pricing accuracy postreform. High-risk firms experienced significantly greater mispricing reductions than low-risk firms. Mechanism tests indicate that this improvement operates through two channels: enhanced litigation risk perceptions incentivizing preemptive governance improvements and reduced information asymmetries facilitating accurate valuation. Firms with greater media visibility and nonstate ownership show more pronounced effects. Our identification strategy is supported by robustness tests, including parallel trends validation, alternative policy controls, and propensity score matching. Therefore, procedural legal reforms may improve market efficiency through ex ante disciplinary mechanisms rather than ex post enforcement alone, offering insights for policymakers seeking strong investor protection and market stability in emerging markets.

Suggested Citation

  • Zhao, Guodong & Jiang, Yu & Lei, Xue, 2025. "Litigation access and market efficiency: Evidence from China’s filing registration reform," Finance Research Letters, Elsevier, vol. 86(PF).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pf:s1544612325021142
    DOI: 10.1016/j.frl.2025.108861
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