Does stock market liberalization improve stock price efficiency? Evidence from China

In this study, we examine whether liberalization of the stock market improves stock price efficiency using China's market liberalization pilot program as a shock. We find that investible firms exhibit a significant increase in price efficiency, as proxied by stock price non-synchronicity, after stock market liberalization. The results are robust to a series of tests and remain unchanged after we address the issue of endogeneity. We identify two channels through which price efficiency can be improved: better disclosure by firms and the incorporation of more information into stock prices through the trading activities of foreign investors. We also find that investment becomes more sensitive to prices, further indicating that stock prices have become more efficient. Finally, we find that stock price informativeness also increases.