Stock market liberalization and firm productivity convergence: evidence from the Shanghai-Hong Kong stock connect

Fuyun Zhu (), Wenlan Qiang and Yang Lv
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Fuyun Zhu: Shaanxi University of Science and Technology, School of Economics and Management
Wenlan Qiang: Shaanxi University of Science and Technology, School of Economics and Management
Yang Lv: China Zheshang Bank CO., LTD

SN Business & Economics, 2025, vol. 5, issue 12, 1-23

Abstract: Abstract Using China’s 2014 Shanghai-Hong Kong Stock Connect as a quasi-natural experiment, we examine how stock-market liberalization affects the total factor productivity (TFP) of domestic listed firms. Based on panel data from 584 listed firms during 2012–2016, we employ a difference-in-differences (DID) approach combined with propensity score matching (PSM). Our findings reveal that stock market liberalization significantly enhances the TFP of target firms. Further mechanism analysis shows this positive effect operates through three channels: (i) alleviating financing constraints; (ii) fostering innovation investment; and (iii) reducing agency costs. Heterogeneity analysis indicates that the effect is more pronounced for state-owned enterprises (SOEs) and firms with more balanced ownership structures (high equity balance), while non-state-owned firms ( (non-SOEs) and firms with concentrated ownership (low equity balance) experience limited benefits. Additionally, stock market liberalization promotes a powerful “convergence effect” in firm productivity: firms with higher initial financing constraints or lower innovation levels show more substantial TFP improvements, while firms already at the productivity frontier see minimal gains. These findings provide empirical support for further stock market liberalization policies while highlighting the crucial role of innovation strategies in sustaining long-term firm productivity growth.

Keywords: Firm productivity; Stock market liberation; Shanghai-Hong kong stock connect program; Difference-in-differences (DID) estimation; Propensity score matching (PSM); 91G15; 62P20; 91B44 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s43546-025-00989-3

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