The effect of daily price limits on stock liquidity: Evidence from the Chinese stock market

Hao Li and Zhisheng Li

Accounting and Finance, 2022, vol. 62, issue 5, 4885-4917

Abstract: This study uses a group of specially treated stocks to examine the effect of daily price limits in the Chinese stock market. We show that lower price limits significantly reduce liquidity and widen spreads. These results remain consistent when using difference‐in‐differences regressions with propensity score matching and after conducting regression discontinuity analyses. The findings are more prominent for firms experiencing lower‐limit hits, with higher disclosure quality and lower probability of informed trading before the limit changes. These findings suggest that restrictive price limits cause unexpected behaviour of informed traders, enhance information asymmetry, reduce stock liquidity, and hinder price discovery process.

Date: 2022
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