From voice to exit: The unintended governance consequences of China's Stock Connect policy

China's capital market liberalization aims to improve corporate governance by attracting sophisticated foreign investors and enhancing market efficiency. This paper evaluates the governance consequences of this policy for domestic minority shareholders by examining the impact of the Shanghai-Shenzhen-Hong Kong Stock Connect programs on shareholder activism. Using the staggered implementation of the program as an exogenous shock to stock liquidity, we find that Stock Connect eligibility is associated with a significantly lower likelihood of minority shareholder activism than at comparable non-eligible firms. Mechanism analysis shows that this relative decline operates through the liquidity channel. The program improves stock liquidity, which lowers the cost of exit and shifts minority shareholders’ governance calculus away from costly direct intervention. The policy effect is concentrated among eligible firms in the high-liquidity group and absent in the low-liquidity group, consistent with a liquidity threshold below which the exit channel cannot be activated. This relative decline in activism is not associated with deterioration in governance. Tunneling indicators remain stable, and stock price informativeness improves significantly among eligible firms following implementation. These findings indicate that in emerging markets with weak institutional protections, capital market liberalization can substitute market-based mechanisms for direct governance intervention without a measured deterioration in governance outcomes. The results carry implications for policymakers designing liberalization frameworks in concentrated-ownership markets.