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Stock Market Liberalization and Corporate Investment Efficiency: Empirical Evidence from the Shanghai-Shenzhen-Hong Kong Stock Connect Programs
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Author: Yanfei Su, Yuanyuan Ye, Yunxi Fu
Abstract: The launch of the Shanghai-Shenzhen-Hong Kong Stock Connect programs marks a milestone in China's capital market liberalization, accelerating the integration and interaction between mainland and Hong Kong markets. Using the Stock Connect implementation as a quasi-natural experiment, this study investigates its impact on corporate investment efficiency through a novel empirical approach combining propensity score matching (PSM) and difference-in-differences (DID) methodologies. The findings reveal that the Stock Connect significantly alleviates corporate under-investment and over-investment problems while improving earnings management practices, thereby optimizing firms' investment efficiency. Our research contributes to the literature by providing micro-level evidence on how capital market openness enhances resource allocation efficiency, addressing the under-explored economic consequences of market liberalization. Furthermore, we propose policy implications for deepening financial reforms and offer strategic insights into corporate governance in emerging markets.
Keywords: Capital Market Liberalization, Shanghai - Shenzhen - Hong Kong Stock Connect, Investment Efficiency, Earnings Management
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