How does stock market liberalization influence corporate innovation? Evidence from Stock Connect scheme in China

摘要

Using China's Stock Connect program as a quasi-natural experiment, we assess the impact of stock market liberalization on corporate innovation. The baseline result based on a difference-indifferences (DID) estimation suggests that allowing foreign investors to buy domestic stocks has a beneficial effect on Chinese firms' innovative outputs. Specifically, eligible firms affected by the Stock Connect scheme generate more and higher quality patents than other unaffected firms subsequently. Furthermore, we explore potential channels that may explain this beneficial effect in terms of improving corporate governance, reducing information asymmetry, and mitigating financial constraints. In addition, the effect is more pronounced for firms in high-tech industries. However, we find that the influence of stock market liberalization is insignificant in state-owned firms. Besides, the findings are generally robust to different measures of innovation and different methods of estimation. Overall, this paper provides new insights into understanding the positive effect of stock market liberalization in emerging market economies.