“Limited learning”: The effect of price limits on managerial learning

This paper examines the impact of price limits, a unique feature of market microstructure in the Chinese stock market, on managerial learning from stock prices. We find that price limits hinder the efficiency of managerial learning by reducing the informativeness of stock prices. To address endogeneity concerns and establish causal inference, we exploit a quasi-natural experiment based on the 2020 reform of price limit rules on the ChiNext board, which relaxes daily price fluctuation constraints. We find that this reform significantly increases firms' investment sensitivity to stock prices, suggesting that managers can extract valuable information from market prices better when trading restrictions are loosened. Further analysis indicates that the negative effect of price limits is more pronounced in firms with management shareholding, low-ability management, and less over-confident management. We also find that the price limits hinder firms' investment efficiency. Overall, our findings shed light on the economic consequences of price limit regulation and provide empirical evidence to inform ongoing policy discussions.