Stock market liberalization and management earnings forecasts: Evidence from a quasi-experiment in China

Abstract

This study examines the impact of Chinese stock market liberalization on the quality of firms' information disclosures. Although previous studies have explored the economic outcomes of stock market liberalization, little is known about its impact on the quality of management earnings forecasts. We treat China's Stock Connect program as a quasi-experiment and draw data from Chinese A-share-listed companies from 2012 to 2017. Using a staggered difference-in-difference model, we find that eligible firms issue more accurate earnings forecasts after implementation of the Connect program compared with ineligible firms. Our mechanism analyses show that the positive effect is more pronounced for firms with initially opaque information environment and higher ex ante agency costs, suggesting that market liberalization facilitates higher-opaque firms to issue more accurate earnings forecasts to meet the information demand from foreign investors, and facilitates monitoring in firms with weak internal governance, thereby improving earnings forecasts quality.