Research On The Impact Of China’s Capital Market Liberalization On Enterprises

China’s capital market has been opening up rapidly in recent years.General Secretary Xi Jinping stated at the 2018 Boao Forum for Asia(BFA)that “China will significantly further expand the opening-up of the capital market”.Since then,Yi Gang,governor of the People’s Bank of China,has elaborated on the relaxation of foreign investment access conditions and restrictions.Fang Xinghai,vice chairman of the China Securities Regulatory Commission(CSRC),stated at the 2020 China International Financial Forum that the CSRC will make every effort to promote a new pattern of high-level opening of the capital market,and to promote the construction of domestic-international dual circulation.At present,the key areas of China’s capital and financial account opening-up are capital market and currency market,among which the stock market is the largest component.On the one hand,since 2018,China has declared several policies which are beneficial for foreign investors,for example,China has announced more than 50 opening-up policies,including further expanding the Mainland-Hong Kong Stock Connect quota,accommodating more stocks in Mainland-Hong Kong Stock Connect pool,releasing qualified foreign investors(QFII)quota,etc.As a result,the market value and proportion of foreign capital held in China’s stock market is rising continually,the replacement trend of QFII by Mainland-Hong Kong Stock Connect has become more and more obvious;the investing industry preference of foreign investors has been shifted.However,on the other hand,due to the trade friction between China and the USA and the COVID-19 epidemic,the uncertainty and the volatility of the macroeconomic situation has increased both domestically and internationally.The above facts show that Chinese enterprises are facing risks from the China’s capital market as well as the international capital market,while they are gaining funds from foreign investors at the same time.Under the background of the opening-up capital market in China,considering the coexistence of opportunities and risks that the Chinese enterprises are facing,this paper attempts to answer the following questions: whether the further opening-up of the capital market can alleviate the financing constraints and reduce the cost of equity of enterprises? In addition,has the opening-up of the capital market improved the risk-taking ability of enterprises? Can it increase the ability of enterprises to resist risks in a black swan event such as the Covid-19 epidemic,or can it bring additional risk shocks to enterprises? Further,are there any differences between the two capital market opening policies of Mainland-Hong Kong Stock Connect and QFII? Are the above effects heterogeneous between state-owned companies and non-state-owned companies,between companies in high-tech industries and in non-high-tech industries,or between companies that located in regions with different degrees of openness? And through what mechanism does the opening-up of the capital market affect the enterprises?Based on the information asymmetry theory and the principal-agent theory,this paper first analyzes the mechanisms of the influence of the capital market opening-up on the enterprises from the theoretical level.Then the paper takes China’s A-share listed companies from 2016 to 2020 as a sample and uses the two-way fixed effect model to test the effects of capital market opening-up on listed companies from three perspectives: financing constraints,cost of equity and risk-taking.Further,this paper examines whether the opening-up of the capital market has a differential impact on enterprises between state-owned companies and non-state-owned companies,between companies in high-tech industries and in non-high-tech industries,or between companies that located in regions with different degrees of openness.In order to verify the mechanism of capital market opening-up on the enterprises,the paper also tests empirically from the information disclosure channel and agency cost channel.Other than the above tests,in the risk-taking part,this paper also adopts the difference-in-difference model to examine the anti-risk ability of foreign-owned companies during the COVID-19 pandemic shock.Through the above research,the main findings of this paper are as follows:First,the empirical results from the perspective of financing constraints show that:(1)The opening-up of the capital market has effectively alleviated the financing constraints of listed companies in China.One standard deviation increase in the foreign shareholding ratio will decrease its financing constraints by 4.68% on average,holding all the other factors at the mean level.(2)Both the Mainland-Hong Kong Stock Connect and the QFII have effectively reduced the financing constraints of enterprises,the effect of Mainland-Hong Kong Stock Connect is slightly less than that of the QFII policy.The reason behind that may come from the sequence of the launch time between Mainland-Hong Kong Stock Connect and QFII.Mainland-Hong Kong Stock Connect was introduced later than QFII,investors,companies and the market still need more time to get familiar with the Mainland-Hong Kong Stock Connect policy.And it needs time for the policy that be transmitted from policy-making level to policy-acting level.(3)In the process of capital market opening-up,corporate property rights,industry characteristics and regional differences will respectively have heterogeneous effect on financing constraints.Specifically,during the sample period(2016-2020),the effect of foreign shareholding on the financing constraints of state-owned enterprises,non-high-tech enterprises and enterprises located in province with lower openness level is significantly higher than those in the opposite groups.In terms of high-tech and non-high-tech enterprises,Mainland-Hong Kong Stock Connect has a greater effect on non-high-tech companies,whereas QFII has a greater effect on high-tech enterprises.For enterprises located in provinces with lower openness level,Mainland-Hong Kong Stock Connect exerts higher impact on enterprises than QFII.The results demonstrate that the Mainland-Hong Kong Stock Connect has a significant effect on solving the financing constraints of the enterprises that lack vitality in the capital market.Moreover,the opening-up of the capital market has effectively alleviated the financing constraints of listed companies in areas with strong financing constraints,which means the policies introduce active funds into our capital market.(4)The empirical tests of mechanism part show that the effect of capital market opening-up policy on alleviating financing constraints is stronger in companies with lower corporate information transparency and higher agency costs.QFII policy plays a better role in channel mechanism analysis than Mainland-Hong Kong Stock Connect policy.This finding shows that the opening-up of the capital market reduces the company’s financing constraints mainly by improving the company’s information disclosure level and reducing the company’s agency cost.In addition,because QFII was introduced earlier than Mainland-Hong Kong Stock Connect,it has more significant impact in terms of alleviating financing constrains.Second,the research results based on the perspective of cost of equity show that:(1)The opening-up of the capital market can significantly reduce the cost of equity.One standard deviation increase in the foreign shareholding ratio will decrease the cost of equity by 1.5% on average,holding all the other factors at the mean level.It demonstrates that the opening-up of the capital market can meet the policy expectation of reducing transaction costs,thereby improve the operation efficiency of the stock market.(2)Mainland-Hong Kong Stock Connect plays a significantly better role than QFII in reducing the cost of equity.(3)In the process of capital market opening-up,corporate property rights,industry characteristics and regional differences will respectively have heterogeneous effect on the cost of equity.Specifically,the effect of foreign shareholding(both Mainland-Hong Kong Stock Connect holdings and QFII holdings)on the cost of equity of non-state-owned enterprises,high-tech enterprises and enterprises located in province with lower openness level is significantly higher than those in the opposite groups.(4)The empirical tests of mechanism part show that the capital market opening-up policy reduces the cost of equity by improving the transparency of the company’s information disclosure and reducing the agency cost.Third,the empirical results from the perspective of risk taking show that:(1)The opening-up of the capital market has effectively improved the risk taking level of listed companies.One standard deviation increase in the foreign shareholding ratio will increase the company’s total risk by 0.35% on average,increase the company’s systematic risk by 0.21% on average,increase the company’s idiosyncratic risk by0.37% on average.(2)Mainland-Hong Kong Stock Connect has a significant effect on improving corporate risk-taking level,while QFII has no significant effect.In addition,the effect of Mainland-Hong Kong Stock Connect on improving the systemic risk is significantly stronger than that of improving the idiosyncratic risk.(3)In the process of capital market opening-up,corporate property rights,industry characteristics and regional differences will respectively have heterogeneous effect on risk-taking.In terms of corporate property rights heterogeneity,compared with state-owned enterprises,foreign shareholding(both Mainland-Hong Kong Stock Connect holdings and QFII holdings)has a significant effect on non-state-owned enterprises in improving their risk-taking level.Specifically,Mainland-Hong Kong Stock Connect has significantly increased the systemic risk and total risk of non-state-owned enterprises,but the significance level of promoting idiosyncratic risk is relatively lower.In terms of industry heterogeneity,capital market opening-up has almost no significant impact on the total risk and idiosyncratic risks between non-high-tech companies and high-tech companies.Foreign shareholding,on the other hand,significantly increases the systemic risk of high-tech companies compared with non-high-tech companies.In addition,Mainland-Hong Kong Stock Connect plays a significantly greater role than QFII in promoting total risk and systemic risk.In terms of regional openness heterogeneity,capital market opening-up has significantly improved the total risk and systemic risk of companies that are located in provinces with higher openness level,and has a less significant effect on improving the idiosyncratic risk.In addition,Mainland-Hong Kong Stock Connect plays a significantly greater role than QFII in promoting risk-taking level of companies that are located in provinces with higher openness level.(4)The empirical tests of mechanism part show that the capital market opening-up policy increases the total risk as well as the idiosyncratic risk,decreases the system risk by improving the transparency of the company’s information disclosure.Other than that,the capital market opening-up policy increases the total risk and the system risk by reducing the agency cost.However,this channel cannot significantly increase the firm’s idiosyncratic risk.The above findings are more pronounced in the Mainland-Hong Kong Stock Connect sample.(5)Foreign shareholding increases enterprises’ risk-taking level on average,but reduce the risk-taking level significantly when companies encounter exogenous shocks,such as COVID-19.It shows that the introduction of foreign capital to the enterprises is very helpful to resist risks in the complex circumstances,and such an effect is significant both with Mainland-Hong Kong Stock Connect policy and the QFII policy.This further verifies that China’s adherence to opening up the capital market is correct.Based on the aforementioned research content and main findings,the innovations and main contributions of this paper are as follows:First,this paper uses a quantitative micro-proxy variable to evaluate capital market opening-up level.Unlike most domestic scholars,who use QFII,the Shanghai-Hong Kong Stock Connect policy in 2014 or the Shenzhen-Hong Kong Stock Connect policy in 2016 as quasi-natural experiments to investigate the impact of capital market opening-up on the enterprises,This paper uses the aggregate amount of the company’s Stock Connect shareholding and QFII shareholding as the proxy variable of capital market opening at the enterprise level,in which way the opening-up of capital market can be tested more objectively.Further,this paper divides foreign shareholding into Mainland-Hong Kong Stock Connect shareholdings and QFII\RQFII shareholdings,and examines the effect of capital market opening-up policy heterogeneity at micro-level.In this way,the relationship between capital market opening-up and corporate financing constraints,cost of equity and risk-taking can be more accurately examined.Second,this paper extends the duration of the research on the impact of capital market opening-up.Most papers discuss impact of capital market opening-up based on the Mainland-Hong Kong Stock Connect.However,the level of China’s capital market opening-up has been surging since 2016,especially in 2019 and 2020.Considering the fast-improving capital market openness in China,this paper revists the relationship between capital market opening-up and enterprise activities and tries to reveal the latest effect.Other than that,this paper is trying to provide the government with latest empirical stones.Third,this paper extends the research on the impact of capital market opening-up on enterprise risk-taking.This paper considers corporate risk into three dimensions:total risk,system risk,and idiosyncratic risk.Based on the above three dimensions,this paper examines the impact of capital market opening-up on corporate risk-taking ability.This paper further explores the ability of companies that partially owned by foreign investors to resist risk when companies encounter exogenous shocks,such as COVID-19.There are few domestic researches on the impact of capital market opening-up on enterprise risk-taking,and none of them subdivide risk-taking into three dimensions,namely total risk,system risk and idiosyncratic risk.This paper fills the gap,enriches the research on the opening-up of the domestic capital market and provides Chinese experience and evidence.Finally,this paper also provides strong practical and policy implications.The process of opening up China’s capital market has been accelerated since 2018.The international and domestic macro environment is unpredictable.More and more people from industry and from academic fields are beginning to pay attention to the impact of capital market opening-up.This paper reveals that the opening-up of the capital market can effectively alleviate the financing constraints,reduce the cost of equity and promote enterprises to take the initiative to increase their awareness of risk-taking so as to increase profit income.In addition,the opening-up of the capital market can increase the ability of enterprises to resist risks in a black swan event such as the Covid-19 epidemic.The above findings verify China’s spirit of “improving the level of capital market opening-up and establishing a multi-level capital market system”.They also provide abundant empirical evidence to support China’s deeper opening-up of capital market.This paper also provides policy implications in the following aspects:(1)In view of the heterogeneous effect of the capital market opening-up to enterprises caused by enterprise property rights,industry characteristics and regional openness differences,government should adjust relative policies accordingly.(2)The government should improve the corresponding laws and regulations,improve the investor protection system,standardize the behavior of management,and improve market transparency.(3)The government should carefully prevent risks related to the opening-up of the capital market,especially focus on system risk of non-state-owned enterprises and high-tech enterprises,in case the occurrence of vital risks.Moreover,policy makers and managers from provinces and cities with a high degree of openness should strengthen risk identification,establish a set of monitoring and early warning systems targeted on enterprises with foreign shareholdings.