Depoliticization and market efficiency: Evidence from China

We investigate changes in stock price efficiency for politically connected corporations in China. Results show that price synchronicity, an inverse measure of price efficiency, declines significantly when firms lose political connections. This effect is more pronounced for firms headquartered in areas with higher marketization. Using the release of Regulation-18 as a quasi natural experiment, we find that post Regulation-18, synchronicity declined across firms with the effect of depoliticization becoming, 11% stronger. We identify public exposure of firm misconducts as a channel for depoliticization reducing synchronicity because firms are more likely to get publicly exposed for misconducts after depoliticization.