Implicit barriers, market integration and asset prices: Evidence from the inclusion of China A-shares in MSCI global indices

Abstract

We examine the stock price reactions to the mass inclusion of China A-shares in the Morgan Stanley Capital International (MSCI) global indices and find that stocks that would be included in the MSCI global indices earned significantly positive abnormal returns when the inclusion plan was first announced. These unusual stock price changes are proportional to firm-specific conditional market risk, but not to firm-level changes in expected future cash flows or the domestic shareholder base. We also show that better firm transparency and stock liquidity strengthen the positive relationship between conditional market risk and stock price revaluation. Moreover, there is a positive externality effect on the stock prices and risk exposures of stocks that would not be included in the MSCI global indices. Our results demonstrate that MSCI inclusion not only directly integrates index-included stocks with the global market but also indirectly integrates non-index-included stocks with the global market. Since the successful inclusion of A-shares in MSCI global indices implies the reduction in implicit market barriers to international investors, our results provide empirical evidence for the proposition that the reduction in implicit market barriers contributes to market integration from the perspective of stock price revaluation.