China’s stock market liberalization, exemplified by the Mainland China–Hong Kong Stock Connect (MCHKSC), presents a pivotal setting to examine whether opening markets enhances capital market informational efficiency. Exploiting the quasi‐natural experiment of the MCHKSC’s phased rollout, we employ a staggered difference‐in‐differences design to estimate its causal effect. We find that the MCHKSC significantly reduces stock price synchronicity, indicating a move toward more informationally efficient markets. Mechanism tests show that this effect operates through two channels: a mitigation of information asymmetry and a strengthening of corporate governance. Furthermore, we document significant economic consequences: the reduction in synchronicity is associated with lower stock price crash risk, improved corporate growth prospects, and more efficient capital allocation. Our study provides robust causal evidence on how stock market liberalization fosters capital market development in emerging economies.
Wu et al. (Thu,) studied this question.