The Role of Private Disclosures in Markets with Weak Institutions: Evidence from Market Liberalization in China

I use the announcement of a market liberalization pilot program in China as a shock to firms’ disclosure environment and examine how the Chinese firms, foreign investors, and foreign brokers respond. Using a proprietary dataset, I find that affected firms respond to announcement by significantly increasing the number of selective private meetings hosted by major foreign brokers, but do not use public disclosure channels. I find this increase in private disclosure to be stronger among firms that had strong public disclosure track record and are in need of capital. Firms that increased private disclosure experience improvements in speed of price discovery and liquidity. In addition, they also experience an increase in foreign holdings and raise capital abroad through foreign brokers after the pilot program’s implementation. Overall, this paper takes a yet-to-mature economy, presents evidence on dynamic shaping of disclosure, and highlights private disclosure as an important positive channel of communication.