Valuing reform: How China's stock connect programs correct firm mispricing

This paper investigates the impact of equity market liberalization on firm-level misvaluation using the staggered implementation of China's Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs as a quasi-natural experiment. Drawing on a difference-in-differences framework and two complementary misvaluation measures, we find that market access reforms reduce pricing deviations from firm fundamentals. This effect is primarily driven by a correction of undervaluation, particularly among private firms and smaller enterprises. Further analyses suggest that reduced information asymmetry—reflected in improved market liquidity and strengthened corporate governance—plays a central role in these valuation adjustments. Additionally, post-reform improvements in investor sentiment are associated with the reversal of undervaluation. Our findings provide new evidence on the firm-level efficiency gains from capital market opening in China and underscore the importance of institutional features in shaping the benefits of financial liberalization.