Does the Capital Market Opening Improve the Price Discovery Efficiency of Stock Market? An Empirical Research Based on Shanghai-Hong Kong Stock Connect

Abstract

Whether capital market opening improves the price discovery efficiency of stock market is an important issue. Shanghai-Hong Kong Stock Connect (hereafter, SHKSC) is a milestone event in the opening up of China's capital market. Based on SHKSC, using the method of PSM + DID, we study the impact of capital market opening on the price discovery efficiency from two dimensions-stock price information content and price reaction speed to information. Our research shows that capital market opening did not increase stock price information content, but speed up the reaction of price to information. Therefore, capital market opening improves capital market's price discovery efficiency in terms of response speed of stock price to information. Further analysis shows that capital market opening affects stock price reaction speed through improving market information environment and reducing insider trading, but it has not yet had a substantial impact on listed companies' earnings quality, which is the main participant in the capital market, and therefore has failed to influence the stock price information content. In order to maximize the effectiveness of capital market opening, it is necessary to introduce more effective policies to improve the information disclosure quality of listed firms and reduce the level of insider trading.