Does stock market liberalization improve stock price efficiency? Evidence from China

In this study, we examine whether liberalization of the stock market improves stock price efficiency using China's market liberalization pilot program as a shock. We find that investible firms exhibit a significant increase in price efficiency, as proxied by stock price non-synchronicity, after stock market liberalization. The results are robust to a series of tests and remain unchanged after we address the issue of endogeneity. We identify two channels through which price efficiency can be improved: better disclosure by firms and the incorporation of more information into stock prices through the trading activities of foreign investors. We also find that investment becomes more sensitive to prices, further indicating that stock prices have become more efficient. Finally, we find that stock price informativeness also increases.

Automated summary

This study examines the impact of stock market liberalization on stock price efficiency, using China's market liberalization pilot program as a shock. The results show that stock prices of investible firms become more synchronized after the liberalization, indicating an improvement in price efficiency. The study identifies two channels through which price efficiency is enhanced: better information disclosure by firms and increased incorporation of information through trading activities of foreign investors. The study also finds that investment becomes more sensitive to prices, further supporting the increase in stock price efficiency.