Stock Market Liberalization and Firm Innovation: Evidence from China

We use listed firms data spanning 2010-2017 to study how stock market liberalization affects firm innovation in the context of China, where a quasi-natural experiment called "the China Connect " was conducted in 2014. The difference-in-difference is employed to identify the causal effect and we find that stock market liberalization has significant positive effect on corporate innovation and the marginal effect features an increasing trend. This relation is robust in propensity score matching, high dimension fixed-effect regressions, double machine learning method and alternative innovation measures. Stock market liberalization can not only bring direct knowledge spill-over effect that help firms innovate in both known and unknown areas, but also improve the financing quality and stability of listed firms in stock market. Meanwhile, it can improve the insurance for firm managers against innovation failures.