Two Essays on Stock Market Liberalization


Student thesis: Doctoral Thesis

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Awarding Institution
Award date13 May 2020


This thesis includes two essays about corporate finance. One paper investigates the relationship between stock market liberalization and corporate social responsibility. The other one explores the impact of stock market liberalization on tax avoidance.

The first paper is about corporate social responsibility. Exploiting a quasi-natural experiment in China in which some firms become investible to the global market across different periods (i.e., pilot firms), we evaluate the role that stock market liberalization plays in shaping local firms’ incentives to invest in corporate social responsibility (CSR) activities. In staggered difference-in-differences research design, we find that stock market liberalization reduced the firm’s CSR investment significantly. This result is concentrated among firms that suffer worse agency problems. Further analysis shows that pilot firms experience higher labor productivity and better stock performance after reducing their CSR in the post-liberalization period although a major negative externality is that they emit more pollution. Collectively, our results suggest that market liberalization induces local firms to cut CSR activities, benefiting shareholders at the expense of the environment. Our findings provide new insights into the importance of globalization to corporate social responsibility and the social welfare of the liberalized country.

To explore the impact of market liberalization on tax avoidance, we employ the two market liberalization programs in China, Shanghai-Hong Kong Stock Connect (SHSC) program and Shenzhen-Hong Kong Connect Program (SZHSC), as an exogenous shock to the stock market liberalization. By employing the staggered difference-in-difference regression and Chinese listed firms, we found that the market liberalization would reduce about 13% tax avoidance. This result is robust to parallel trend examination, falsification test, alternative regression methodology and different measurement for tax avoidance. In addition, this effect is greater at non-state-owned firms and for firms that have less external monitoring, higher information asymmetry, and financial constraint.