The Real Effects Of Foreign Investors Introduced By Shanghai/Shenzhen-Hong Kong Stock Connect Program On Corporate Mergers And Acquisitions

The continuous opening up of the capital market is an important measure to build a new system of higher-level open economy during the 14 th Five-year Plan period and a crucial way of improving the socialist market economy system in the new era.The opening of China’s capital market has accelerated significantly in recent years.The introduction of foreign investors through the Shanghai/Shenzhen-Hong Kong Stock Connect improves corporate governance,alleviates agency conflicts between management and shareholders,and exerts a profound impact on corporate investment decisions.Merger and acquisition(M&A)have been proven to be of great importance in the corporate decision,which is the main way for an enterprise to expand its boundary and improve the efficiency of resource allocation.It is also an important carrier for financial services to the real economy,and has significant positive significance for industrial transformation and upgrading and macroeconomic development.However,compared with the capital market of developed countries,the efficiency and effect of mergers and acquisitions of Chinese firms are still at a lower level,and it is difficult to meet the needs of increasingly fierce international competition.Facing the external environment of profound changes at home and abroad and the institutional background of China entering a new stage of development,it is of strong theoretical and practical significance to systematically explore the influence of foreign investors introduced by the capital market opening system innovation with Chinese firms on the decision-making and economic consequences of M&A activities.The paper studies the role of foreign investors in the Chinese stock market by using the daily stock-level holdings of all northbound investors’ shareholding and trading data through Shanghai/Shenzhen-Hong Kong Stock Connect Program.Using a new a sample of mergers between 2017 and 2021 among Chinese listed firms,we explore the real effects of foreign investors on M&A decision and performance.First,this paper examines the influence of foreign investors on M&A decision.The results show that firms with higher foreign investors’ shareholding have lower probability of M&A decisions as well as the small number and scale of M&A activities.This effect is stronger when acquirers are larger firms and with poor information environment.We provide agency cost reducing and stock price information efficiency improving channels through which foreign investors play a monitoring role in M&A decision.Second,this paper tests the effect of foreign investors the choice of payment method in mergers and acquisitions.We find that bidders with a higher proportion of foreign investors are more likely to use cash payment in a takeover.We attribute this finding to lower financing constraints and stock price misevaluation.Furthermore,the positive effect is more pronounced in firms with lower liquidity level and higher dependence on external financing.Third,we study the role of foreign investors in affecting the quality of acquisition deal.We show that high foreign investors’ shareholding acquirers achieve significantly higher abnormal announcement period returns than low foreign investors’ shareholding acquirers.Additional tests suggest that the positive effect is more prominent in non-state-owned firms and firms with low product market competition.Foreign investors curtail empire building through enhancing synergies to improve business performance and reduce the premium paid.Our findings highlight an important channel through which foreign investors improve efficiency and create shareholder value.Finally,this paper examines the relation between investors trade behavior and merger completion.We document that the increase activities after the M&A announcement of foreign investors relate positively to the likelihood of deal completion and negatively to the complete days,which means that companies seem to learn from foreign investors trade behavior.The learning is more obvious when the initial holding of northbound investors is small,the overall northbound capital inflow in the market during the announcement period is large,and the investor attention is higher.Moreover,the effect is significant in the signed M&A deals and the initiated transactions of small companies(with higher cancellation costs).Further research shows that the learning channel of management lies in the information advantage of foreign investors,and the effect of trading behavior on M&A completion is more obvious after arbitrage regulatory reform.This research expands the research scope of introducing foreign investors into the field of corporate finance in the capital market opening,enriches the research on the influencing factors of M&A in the aspect of foreign investors,and also provides empirical evidence for the economic consequences of foreign investors based on micro enterprise M&A decisions and performance.This paper also has strong practical significance.The regulators of Chinese capital market should fully recognize the positive role of northbound investors in resource allocation and efficiency improvement brought by capital market opening,and realize the optimal allocation of resources by taking advantage of the opportunity of institutional reform.The listed firms should make full use of the opportunity of capital market opening,and make use of various technical means and platforms to have in-depth communication and exchanges with foreign investors,so as to improve the efficiency and effect of M&A activities and realize the improvement of core competitiveness of enterprises.The participants of the capital market should make full use of the convenience that the shareholding and trading behavior of northbound capital investors can be observed daily and make rational investment decisions to maximize their own interests.