Stock Market Liberalization and Corporate Investment Revisited

A recent reform in China, the Shanghai-Hong Kong Stock Connect program, made a subset of Chinese stocks investable for foreign investors, thus partially opening China’s stock market. We use this reform to examine the quantity and quality effects of stock market liberalization on corporate investment and address some of the data and methodological concerns raised in previous studies. Our difference-in-differences analysis shows that the reform boosts the investment of investable firms relative to non-investable firms. It also makes the investable firms’ investment more responsive to growth opportunities, increases their total factor productivity, and improves their operating performance. Further analysis finds that the reform increases equity issuance, reduces agency costs, and mitigates earnings management, which helps explain its quantity and quality effects on corporate investment.