Do managers learn from stock prices in emerging markets? Evidence from China

In this study, we examine whether managers learn from stock prices when making investment decisions in the context of emerging markets. Adopting the Shanghai-Hong Kong Stock Connect scheme launched by the Chinese government as a quasi-natural experiment, we determine that openness to global investors improves the investment efficiency of firms included in the scheme. We provide supporting evidence of managers' learning behavior proving that the effect is strengthened (weakened) for stocks whose prices convey more (less) incremental information after the scheme launched. Furthermore, we observe a more pronounced effect in firms eager to obtain the information of technology frontier and product market from foreign investors. Alternative explanations, like improving corporate governance, mitigating financial constraints, increasing executive incentives, and attracting analyst coverage are empirically excluded. Overall, this study contributes to the literature by documenting whether the information role of stock prices succeeds in improving firms' investment efficiency in emerging markets.