Cross-Border Equity Market Integration and Corporate Investment Efficiency: Evidence from China
Abstract
This paper explores a practical question: when stock markets become more connected across borders, does that actually push companies to make better investment decisions? To examine this, China and Hong Kong's cross-border stock trading program is used as a real-world test case. What makes this setup useful is that it allows foreign investors to trade shares in certain Chinese companies without changing how those companies are run internally, so any behavioral shifts can be traced back to market integration itself.
Drawing on data from Chinese publicly listed companies between 2010 and 2023, the study measures how far each firm's investment decisions stray from the optimal level. Through regression analysis controlling for individual company characteristics and broader yearly trends, the paper tracks what happens to firms once they join the program.
The findings are fairly clear: companies that joined the cross-border trading program became noticeably better at allocating capital compared to those that didn't. The improvement unfolds gradually rather than immediately, suggesting firms need time to adjust to new investor dynamics. These findings hold up across different measures of investment efficiency and different sample configurations.
Overall, this study offers a firm-level perspective on what financial integration actually does in practice. It shows that opening equity markets to a broader pool of international investors can meaningfully improve how companies deploy their resources.
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