Lishuai Lian, Jianrong Wang, and Bo Wang Economic Analysis and Policy (forthcoming)

DOI: https://doi.org/10.1016/j.eap.2026.07.039

What the paper is about

When a country opens its stock market to foreign investors, the usual hope is that sophisticated outsiders will raise the quality of local corporate governance. We ask a question that has received far less attention. What happens to the domestic minority shareholders who already do most of the day-to-day monitoring inside Chinese firms once that opening arrives?

We study the staggered rollout of the Shanghai and Shenzhen-Hong Kong Stock Connect programs, which made the shares of eligible mainland firms tradable by foreign investors through Hong Kong. Once a firm became eligible, its minority shareholders grew significantly less likely to file formal governance proposals than shareholders at otherwise similar firms that were not yet eligible. The pattern is not disengagement or fear. The program improved stock liquidity, and easier, lower-cost selling made exit an attractive substitute for the slow and costly work of voice. Shareholders who previously had to organize and file proposals could now simply sell when they were dissatisfied.

This shift from voice to exit did not leave firms worse governed. We find no rise in tunneling or expropriation by controlling shareholders, and stock prices became more informative, which is the condition under which the threat of exit can still keep managers in check. The effect is concentrated in firms whose liquidity genuinely improved, consistent with exit becoming a viable option only once liquidity crosses a threshold.

The broader message is that capital market liberalization does more than import governance practices from abroad. It reshapes the incentives of domestic investors, and in markets with weak institutions it can move governance toward a market-based, exit-driven model without weakening the protection of minority shareholders on average. Whether that trade is desirable for any single firm still depends on how well informative prices substitute for direct monitoring, a caveat we take seriously in the paper.

Highlights

  • Stock Connect lowers minority shareholder activism relative to peer firms.
  • The decline is driven by improved liquidity, shifting governance from voice to exit.
  • The exit mechanism requires a minimum liquidity threshold to be activated.
  • Reduced activism does not increase tunneling or weaken corporate governance.
  • Liberalization enables market-based governance in emerging markets.