Do inflowing sophisticated investors induce classification shifting? New evidence from market liberalisation in China

Abstract

Viewing the Shanghai-Hong Kong Stock Connect (SHSC) programme as an initiative of China's market liberalisation programme, this study examines whether inflowing sophisticated investors induce classification shifting in firms listed on China's A-share market. Our analysis, based on a difference-indifferences research design, demonstrates that the influx of sophisticated investors has led to classification shifting in non-cross-listed or non-QFII pilot firms after the launch of the SHSC programme in 2014. The study also illustrates the roles of internal corporate governance and external auditor quality in curbing classification shifting. Our study contributes to a more fine-grained understanding of classification shifting and sheds new light on the unintended adverse effects of market liberalisation.