Coping with the Pandemic: Market Segmentation and Differential Stock Market Reactions to COVID-19

We use segmented dual-class shares of Chinese firms, A shares traded in mainland China by local investors under binding capital controls and H shares traded in Hong Kong by foreign investors, to study cross sectional stock market reactions to the COVID-19 lockdown policy in China. We find significantly negative return in the local market as a result from the COVID-19 outbreak, while controlling for identical corporate fundamentals as the treatment group. Local stock market volatility was also substantially higher than identical H-share firm. We also document sizable capital outflows from Chinese stock market due to the lockdown policy. Overall, our impulse response analysis suggests that the COVID-19 pandemic can impose lasting effects on financial markets within emerging markets with capital controls.