The ESG Impacts of Capital Market Liberalization : Evidence from the Shanghai-Hong Kong Connect and the Shenzhen-Hong Kong Connect

We employ the Shanghai-Hong Kong Connect and the Shenzhen- Hong Kong Connect (hereafter, the Connects) as exogenous shocks to the liberalization of China’s A-share stock market and study how the Connects shape Chinese firms’ ESG policies. The staggered difference-in-differences (DiD) regression results show that the Connects significantly improve the ESG performance of firms investible to Hong Kong investors via the Connects (hereafter, eligible firms). This finding holds in a broad battery of robustness tests, including those addressing the concern about heterogeneous treatment effects with differential timing in staggered DiD estimators. Channel tests suggest that the Connects improve ESG by easing eligible firms’ financing constraints and agency problems. Consistent with these tests, further analyses demonstrate that eligible firms’ financing needs or governance mechanisms and Hong Kong investors’ governance power moderate the Connects’ ESG impacts