Empirical Analysis of the Impact of Future Earnings Response on Stock Price Information Content in the Stock Connect Program

The Mainland-Hong Kong Stock Connect program is a globally unique institutional innovation. This partially open financial system is unparalleled worldwide. As the influence of the Mainland-Hong Kong Stock Connect on A-shares has grown, the volume of research literature has gradually increased, and studies on the policy impact from various sectors have become prevalent. Prior to the introduction of the Mainland-Hong Kong Stock Connect, studies indicated that A-share stock prices did not significantly react to stock information, indicating low informational content in stock prices. The Mainland-Hong Kong Stock Connect, through its moderate openness, has effectively introduced mature overseas investment philosophies and international capital, altering the investor structure of A-shares and impacting trading behavior. This paper aims to explore whether the initiation of the Mainland-Hong Kong Stock Connect policy positively affects the informational content of A-share stock prices under the aforementioned premises. To minimize the interference of short-term market fluctuations on the research, this paper uses the relatively long-term future earnings response as the entry point for studying the informational content of stock prices. Specifically, it first selects a full sample of Mainland-Hong Kong Stock Connect stocks to conduct annual cross-sectional regression and multi-year linear regression to examine changes in the informational content of stock prices before and after policy implementation. It then includes a control group of stocks not selected for the Mainland-Hong Kong Stock Connect, conducting multi-year linear regression analysis with the experimental group samples to investigate whether the policy initiation has improved the informational content of stock prices for Mainland-Hong Kong Stock Connect stocks compared to those not selected. The results show that after the initiation of the Mainland-Hong Kong Stock Connect policy, the informational content of stock prices increased for Shanghai Stock Connect but decreased for Shenzhen Stock Connect. Compared to stocks not selected for the Mainland-Hong Kong Stock Connect, the informational content of stock prices also increased for Shanghai Stock Connect and decreased for Shenzhen Stock Connect. Overall, the results of this study indicate that the Mainland-Hong Kong Stock Connect policy has indeed achieved its initial policy design goals, warranting further exploration into deepening openness to optimize the structure of the capital market.