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Stock market liberalization and corporate investment revisited: Evidence from China

Author

Listed:
  • Li, Zhisheng
  • Liu, Chun
  • Ni, Xiaoran
  • Pang, Jiaren

Abstract

Recent reform in China has made a subset of Chinese stocks available to foreign investors, partially opening up China's stock market. Our difference-in-differences analysis shows that this liberalization reform boosts investments in investable firms relative to noninvestable ones, with results robust to various sensitivity analyses. Besides capital inflows and risk sharing, a potential but underexplored channel is improved corporate governance due to direct and indirect pressures from foreign investors, which lowers the cost of capital and improves capital allocation efficiency. Consistent with this corporate governance channel, we find that the liberalization reform reduces investable firms’ agency costs, increases their investment efficiency and total factor productivity, and improves their operating performance. Further analysis finds that the positive investment effect from the liberalization reform is stronger among firms that were poorly governed before the reform.

Suggested Citation

  • Li, Zhisheng & Liu, Chun & Ni, Xiaoran & Pang, Jiaren, 2024. "Stock market liberalization and corporate investment revisited: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:jbfina:v:158:y:2024:i:c:s037842662300239x
    DOI: 10.1016/j.jbankfin.2023.107053
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    More about this item

    Keywords

    Stock market liberalization; Stock connect; Corporate investment; Corporate governance;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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