Abstract
Expanding the opening up of the stock market is an important part of China's opening up to the outside world. In order to better achieve high-quality economic development, the Chinese government is comprehensively deepening the reform of financial sector and promoting a higher level of openness. Allowing foreign investors to invest in the domestic stock market can help the domestic stock market quickly absorb advanced experience from overseas markets and bring in more experienced investors and value investing, which will change the investment ecology of China's stock market and undoubtedly bring new development opportunities to the stock market. In the long run, it may help improve the ability of the stock market to serve the real economy. Against this backdrop, the economic impact of the stock market opening has become a topic of common concern in both academic and practical fields today. Unlike mature western stock markets, China's securities market is rooted in China's transitional economy, with a low level of protection for small and medium-sized investors, an imperfect legal system in the capital market, prominent legal issues, and immature corporate governance structure. Therefore, in this special institutional environment, further exploration and research are still needed to determine whether China has the conditions for opening up the stock market and fully leveraging its positive economic benefits.The Shanghai-Hong Kong Stock Connect is an important institutional innovation jointly launched by the Shanghai Stock Exchange and the Hong Kong Stock Exchange on November 17, 2014. The implementation of this system is not only an important part of the deepening reform of the mainland stock market, but also a landmark measure for the opening up of the mainland capital market to the outside world. In theory, the implementation of the Shanghai-Hong Kong Stock Connect is conducive to promoting the free flow of funds in the two regions, facilitating investors to make cross-market portfolio investments, and diversifying investment risks. At the same time, it is also conducive to active market transactions, optimizing resource allocation, and improving market efficiency; On the other hand, by interconnecting with the relatively developed Hong Kong stock market, more mature institutional investors and investment concepts can be introduced to the mainland market, improving the structure of mainland investors, and thereby forcing the mainland stock market to align with mature markets in many aspects such as institutional construction, market environment, investor structure and concepts, narrowing the gap between two markets. These two aspects are not only the motivation for the launch of the Shanghai-Hong Kong Stock Connect, but also the strategic significance of the Shanghai-Hong Kong Stock Connect.
In order to better grasp the identity characteristics of foreign investors and explore the economic effects of the implementation of the Shanghai-Hong Kong Stock Connect, this article first analyzes the implementation background and operation status of the Shanghai Hong Kong Stock Connect intuitively based on relevant literature and theory, and then explores the information characteristics and information advantage intensity possessed by foreign investors. Then, we will focus on using empirical research methods to investigate the information improvement effect and supervisory governance effect of foreign investors on the A-share market after the implementation of the Shanghai-Hong Kong Stock Connect. The information improvement effect includes an increase in stock price information content and an increase in company information disclosure quality; the effect of supervision and governance includes the reduction of financing constraints, reduction of agency costs, and improvement of investment efficiency. A detailed examination was conducted on whether financing constraints and agency costs play a mediating role in the process of improving investment efficiency, providing scientific judgment basis for better improving the Shanghai Hong Kong Stock Connect. Finally, based on the analysis of the logical sequence of stock marketization reform and opening-up, this article proposes policy recommendations for the opening-up of China's stock market, and provides more direct empirical support for the Shanghai-Hong Kong Stock Connect as well as the subsequent implementation of the Shenzhen-Hong Kong Stock Connect and the Shanghai-London Stock Connect. Through the above research, the following conclusions have been drawn in this article.
Firstly, investors entering the A-share market on the Shanghai-Hong Kong Stock Connect have an information advantage. Overseas investors have the advantage of information collection, interpretation, and analysis capabilities, and a large number of institutional investors practice the investment philosophy of value investment and long-term investment. Overseas investors help to achieve reasonable market pricing and effective resource allocation, thus promoting the improvement of pricing efficiency in the domestic stock market. By using the Shanghai-Hong Kong Stock Connect policy opening variable as the moderating variable, this study explores the impact of three factors: annual trading volume, annual trading frequency, and annual average trading size on the correlation between stock annual volatility. It is found that the coefficient of the interaction term between the Shanghai-Hong Kong Stock Connect policy opening variable and annual trading volume is significantly positive, indicating that investors introducing A-shares under the Shanghai-Hong Kong Stock Connect mechanism tend to prefer information traders rather than noise traders; The coefficient of the annual average trading size and policy opening variable is positive, indicating that the Shanghai-Hong Kong Stock Connect policy weakens the negative impact of average trading size on stock annual volatility. That is, the investors introduced by the Shanghai-Hong Kong Stock Connect transmit more information through larger transactions. Overall, the traders entering the A-share market through the Shanghai-Hong Kong Stock Connect should be information traders, who can weaken the information advantage of domestic institutional investors' monopoly and make the A-share market more inclined towards a competitive model in an asymmetric information environment.
Secondly, the information traders who enter the A-share market through the Shanghai-Hong Kong Stock Connect can bring about an information improvement effect, which is manifested in increasing the information content of stock prices and improving the quality of company information disclosure. The empirical results show that the correlation coefficient between the opening variables of the Shanghai-Hong Kong Stock Connect policy and the synchronicity of stock prices is negative, indicating that the higher the information content of stock prices after the opening of the Shanghai-Hong Kong Stock Connect policy; The correlation coefficient between the opening variables of the Shanghai-Hong Kong Stock Connect policy and the evaluation results of information disclosure work of listed companies is positive, indicating that after the opening of the Shanghai-Hong Kong Stock Connect policy, the quality of information disclosure of companies is higher. Overall, foreign investors can leverage their information advantages to obtain and utilize enterprise level information, identify undervalued companies in the market, and then feed back the information they possess to the stock prices of the undervalued companies through market transactions; When it is found that the value of a company is overvalued, it can also reduce the phenomenon of overvaluation by selling existing stocks or short selling overvalued stocks. The above trading behaviors bring the enterprise value back to a reasonable level, reduce stock pricing errors in the capital market, and improve the information content and pricing efficiency of stock prices. Moreover, while overseas institutional investors increase their demand for information in the capital market, it makes it more difficult for management to manipulate information, resulting in higher quality information disclosure for the company.
Thirdly, the information traders who enter the A-share market through the Shanghai-Hong Kong Stock Connect can bring about supervisory and governance effects, specifically manifested in reducing financing constraints, reducing agency costs, and improving company investment efficiency. The empirical results show that the opening variables of the Shanghai-Hong Kong Stock Connect policy have a significant positive correlation with the number of monetary funds, indicating that after the opening of the Shanghai-Hong Kong Stock Connect, the company faces less financing constraints; The opening variables of the Shanghai Hong Kong Stock Connect policy are significantly negatively correlated with the company's management expense ratio and other accounts receivable ratio, indicating that after the opening of the Shanghai-Hong Kong Stock Connect, the company faces a reduction in agency costs; The opening variables of the Shanghai-Hong Kong Stock Connect policy are significantly negatively correlated with the company's inefficient investment level, indicating that after the opening of the Shanghai-Hong Kong Stock Connect, the company's investment efficiency improves. Moreover, through the mesomeric effect test, it is found that financing constraints and two types of agency costs play an intermediary role in the process of improving investment efficiency. To sum up, the opening of capital market can improve the company's information environment, decrease the losses of external fund providers due to moral hazard and adverse selection, alleviate financing constraints, and then alleviate the phenomenon of insufficient investment, and improve investment efficiency; In addition, the opening of the capital market can alleviate agency conflicts for companies. Foreign investors, especially institutional investors, can actively participate in the governance of listed companies, reduce the "Hollowing Out" behavior of controlling shareholders, supervise the daily business activities of enterprises, constrain the management's motivation to seek personal gain and whitewash financial reports, reduce the phenomenon of excessive investment by the management, and improve investment efficiency.
The innovation of this article lies in:
Firstly, the opening of the Shanghai-Hong Kong Stock Connect policy has enriched relevant research on the information improvement effect and regulatory governance effect of A-share overseas investors. The sample selected by previous studies on the impact of stock market opening on the information environment of A-shares has strong endogeneity, and previous studies have not explored the information characteristics and strength of information advantages possessed by foreign investors after the stock market opening. The information characteristics that foreign investors possess in this article are innovative and can supplement relevant literature on the Shanghai-Hong Kong Stock Connect.
Secondly, this article takes the operation of the Shanghai-Hong Kong Stock Connect as an exogenous event, and adopts the DID method to some extent to avoid the endogeneity issues that may exist in the study of the economic consequences of stock market opening. The early research on the opening of the stock market cannot be separated from the shareholding of foreign investors. However, foreign investors have a preference for shareholding, which leads to endogeneity in the research results. In the Shanghai-Hong Kong Stock Connect, only some A-share listed companies are allowed to be traded by foreign investors, while other A-share listed companies become the control group. This provides an opportunity for such research to be a "quasi natural experiment" and can provide reference for later research on the opening of the stock market.
Thirdly, the impact of the opening of the Shanghai-Hong Kong Stock Connect policy on the synchronization of stock prices of listed companies was studied. Previous discussions on the relationship between stock market openness and stock price synchronization have been limited, and no unified conclusion has been drawn. This article explores the impact of stock market openness on stock price synchronicity from the institutional background of China's Shanghai-Hong Kong Stock Connect, hoping to supplement relevant research in the field of stock price synchronicity.
Fourthly, this article explores the impact of the Shanghai-Hong Kong Stock Connect policy on investment efficiency by empirical research. Most predecessors have explored the impact of stock market openness on a country's investment efficiency from both macro and capital flow perspectives. However, in the micro field, there is relatively little research on the impact of stock market openness on the investment efficiency of a single listed company. Therefore, this article explores the impact of the opening of the Shanghai-Hong Kong Stock Connect on investment efficiency from a micro level, which can provide richer evidence for related research on investment efficiency.
Fifthly, based on capital market development history, the institutional background and reform and development process of China, this article explores the possible impact of China's stock market opening on domestic A-share listed companies, which is conducive to understanding the impact of China's stock market opening on the behavior of listed companies and whether it promotingpromotes high-quality development of the real economy. This article provides different reperceives such as information disclosure and investment efficiency to enrich research on the economic consequences of China's stock market opening, and providing theoretical evidence for China's future stock market opening policies.
| Date of Award | 3 Oct 2023 |
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| Original language | Chinese (Traditional) |
| Awarding Institution |
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| Supervisor | Jianqiao HONG (External Supervisor) & Junbo WANG (Supervisor) |
Keywords
- Shanghai Hong Kong Stock Connect
- Opening up of the capital market
- Information improvement
- Supervision and governance