STOCK MARKET LIBERALIZATION AND LARGE SHAREHOLDERS’ TUNNELING BEHAVIOR: EVIDENCE FROM THE MAINLAND CHINA-HONG KONG STOCK CONNECT PROGRAM

ABSTRACT This study investigates the influence of stock market liberalization on large shareholders’ “tunneling” behavior. It uses data from A-share listed corporations on the Shanghai Stock Exchange and Shenzhen Stock Exchange for the time period ranging from 2007 to 2018. Employing the Mainland China-Hong Kong Stock Connect program as a natural experiment, we construct a staggered difference-in-differences model and report that stock market liberalization significantly inhibits large shareholders’ tunneling behavior. Further tests found that an increase in stock selling pressure, balancing of stockholder’s rights, and improvement of the information environment are potential mechanisms. Heterogeneity tests reveal that the negative association between stock market liberalization and large shareholders’ tunneling behavior is more prominent in state-owned enterprises and companies that do not use Big 4 auditors. This study confirms that stock market liberalization plays a disciplinary role in mitigating firms’ agency costs in an emerging economy.