Price Limit Reform, Stock Liquidity and Capital Market Performance
ZHAO Jiayue, LU Rui, LIU Jianhua, Jerry CAO
Business School, Sun Yat-sen University; School of Business, Sun Yat-sen University; Lingnan College, Sun Yat-sen University; School of Business, Hang Seng University of Hong Kong
Summary:
A robust foundational structure for the capital market is essential for its high-quality development. As China's capital market reform continues to deepen, the price limit reform (PLR) has undergone its most significant transformation in over two decades. Conducting a comprehensive assessment and evaluation of the pilot PLR program will not only help to reconcile the divergent academic views on the effectiveness of the circuit price limit, but provide more invaluable insights for further capital market reform. This holds great significance for strengthening the capital market's role in resource allocation.Using the relaxation of price limit (from 10% to 20%) on the Growth Enterprise Market (GEM) as a quasi-natural experiment, we conduct a detailed investigation on the policy effects of PLR. First, by analyizing the realization of daily return and the short-term reaction of stock prices after certain shocks, we find that after PLR, the proportion of daily returns reaching ±10% didn't increase but rather decreased, and price change after either positive or negative shocks became more stable, suggesting that PLR has an improvement effect on the market trading environment. Second, the empirical results based on the DID model show that PLR has significantly improved stock liquidity: specifically, under the 20% price limit, the price impact caused by each billion-yuan trading volume has decreased by about 0.73 percentage points, which is equivalent to nearly one-fifth of the average price impact. Third, we investigate the influence channel of PLR on stock liquidity from the perspective of investor behavior, and verify that PLR can alleviate investors' irrational behaviors and restrain speculative manipulations.Finally, we carry out exploratory investigations on the following two questions: First, how does price limit affect price discovery efficiency？ Second, will PLR increase market risk？ The former question is the focus of the academic debate about price limit, while the latter is the most common concern of investors. Our research results show that PLR effectively improved the market pricing efficiency, and did not increase market risk. On the contrary, it reduced market risks by reducing the negative impact on liquidity and restraining investors' irrational behavior and speculative manipulation. Based on the aforementioned findings, we conclude that the relaxation of price limit has exhibited outstanding efficacy during its trial run on the GEM. Analyses from various angles including stock price reaction, liquidity, investor behavior, market pricing efficiency, and liquidity risk thoroughly affirm the effectiveness, appropriateness, and indispensability of PLR. Furthermore, cross-sectional analyses underscore the broad-ranging and pervasive policy impact, providing theoretical underpinnings and decision-making insights for policy makers to advance PLR across the entire market.Our research makes the following contributions to the literatures. First, it reveals the market impact of PLR, providing new empirical evidence for evaluating the policy effects of the ongoing capital market reforms. Prior research primarily focused on the reforms of the issuance system (i.e., the registration-based IPO system), while the research into the trading system is insufficient. We also examine the implementation effects and mechanisms of PLR on market microstructures from the perspectives of stock, investors, and the market.Second, our research enriches the academic discussions on the conventional price limit (especially price limit amplitudes). Existing literature extensively studies the impacts of the price limits of IPO and the price limits of the first day of listing, but pays less attention to the conventional price limit. Moreover, unlike earlier studies focusing on the existence of price limits, we delve into the impact of price limit amplitudes, which carries more important implications for further capital market reform in China and also expands the existing relevant researches.Third, our research enhances the causal effect identification of the market impact of price limit, facilitating the development of unified conclusions. Academic debates surrounding price limit have persisted without consensus. PLR provides an exceptional quasi-natural experiment to elucidate this issue, allowing us to overcome potential biases in prior research and transcend limitations of short-term event studies. By exploiting these advantages, we can focus on the long-term effects of price limit and yield richer and more accurate research conclusions. Additionally, we consider price collar mechanisms, another trading system reform in the Chinese capital market, and compare its impact with that of PLR through policy analysis, statistical examination, and empirical testing, providing valuable complements to the research on the trading system reform in China.
作者简介: 赵家悦,金融学博士,助理教授,中山大学商学院,E-mail:zhaojy225@mail.sysu.edu.cn. 卢 锐,管理学博士,教授,中山大学管理学院/现代会计与财务研究中心,E-mail:lurui@mail.sysu.edu.cn. Jerry Cao,金融学博士,副教授,香港恒生大学商学院,E-mail:jerrycao@hsu.edu.hk.
引用本文:
赵家悦, 卢锐, 柳建华, Jerry Cao. 涨跌停制度变革、股票流动性与资本市场表现[J]. 金融研究, 2024, 525(3): 113-131.
ZHAO Jiayue, LU Rui, LIU Jianhua, Jerry CAO. Price Limit Reform, Stock Liquidity and Capital Market Performance. Journal of Financial Research, 2024, 525(3): 113-131.
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