International integration of capital market and cost of equity capital: evidence from the inclusion of A-shares in the MSCI index

Employing the exogenous shock of the inclusion of A-shares in the MSCI index, this paper examines the impact of the international integration of capital market on the firms’ cost of equity capital. We find that the international integration of capital market reduces the cost of corporate financing. Specifically, the firms’ cost of equity capital has dropped significantly after the inclusion in the MSCI index. Further analyses show that the impact of the international integration of capital market on the cost of equity capital is more pronounced for non-SOEs and firms with higher financing constraints. In addition, our mechanism tests demonstrate that following inclusion in the MSCI index, firms exhibit higher foreign shareholdings, demonstrate greater stock liquidity and engage in less earnings management – all of which contribute to reducing firms’ cost of equity capital. Our research provides empirical evidence for the economic consequences of the international integration of capital market and sheds light on the development of China’s capital market.