Research in International Business and Finance 66 (2023) 101989

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Research in International Business and Finance

journal homepage: www.elsevier.com/locate/ribaf

Impact of capital market internationalization on stock markets:

Evidence from the inclusion of China A-shares in the MSCI
Emerging Markets Index
Shizheng Dong a, Jianming Zheng b, Haoyang Jia b, Zili Zhang c, *
a
School of Business, Zhengzhou University of Aeronautics, Zhengzhou, China
b
School of International business, University of International Business and Economics, Beijing, China
c
School of Public Finance and Taxation, Zhejiang University of Finance and Economics, Hangzhou, China

A R T I C L E I N F O A B S T R A C T

Keywords: This paper assesses the short- and long-term market reaction to including A-shares in the Morgan
Capital market Stanley Capital International Emerging Markets Index. In the short term, the underlying stocks
Market reaction gain cumulative excess returns before and after the announcement date, reflecting a positive
MSCI Emerging Markets Index
signal to the market and presenting a significant index effect. In the long run, including A-shares
in the index may improve market quality by influencing stock market synchronization and
liquidity and turnover rate. Therefore, we suggest that emerging market countries should actively
internationalize their capital markets, introduce foreign investors, increase investor awareness,
and improve their capital market structures.

1. Introduction

The Morgan Stanley Capital International (MSCI) indices consist of several indices compiled by the MSCI Emerging Markets Index,
which selects 60 % of the market value of listed companies within each sector as constituents based on criteria such as size (market
value), long- and short-term trading volumes, cross-shareholdings, and the number of shares outstanding, according to the Global
Industry Classification Standard (Chen et al., 2019). On May 15, 2018, the first A-share listed companies to be added to the MSCI
Emerging Markets Index were officially announced, comprising 234 stocks with an inclusion factor of 2.5 % and a weight of 0.39 % of
the index. On June 1, 2018, the inclusion of A-shares in the MSCI Emerging Markets Index officially took effect. This paper explores the
short- and long-term effects of capital market liberalization on the stock market and its mechanisms based on A-share inclusion in MSCI
indices.
Relatively little literature directly relates to including A-shares in the MSCI Emerging Markets index. Chakrabarti et al. (2005) find
that when stocks are included in the MSCI Emerging Markets index, their prices rise significantly, and therefore, the stock demand
curve is downward-sloping in the short run. Since the price deviation is temporary and the stock demand curve levels off in the long run
after the price reversal, the above finding can be explained by the stock demand-driven hypothesis. Tu and Chang (2012) use the MSCI
China Taiwan Index to study analysts’ responses to stock additions from 1999 to 2007 and find that analysts’ forecast errors for new
stock additions are smaller. They also find that international analysts predict more accurately than local analysts. Hung and Shiu
(2016) analyze the market response to a change in the composition of the MSCI China Taiwan Index and find that abnormal returns are

* Corresponding author.
E-mail address: zhangzili@zufe.edu.cn (Z. Zhang).

https://doi.org/10.1016/j.ribaf.2023.101989
Received 6 March 2023; Received in revised form 16 May 2023; Accepted 19 May 2023
Available online 24 May 2023
0275-5319/© 2023 Elsevier B.V. All rights reserved.
S. Dong et al. Research in International Business and Finance 66 (2023) 101989

significantly positive for the added stocks and negative for the excluded stocks and that foreign investors tend to buy the added stocks
and sell the excluded stocks. Chen et al. (2019) point out that the positive market response to the MSCI Emerging Markets index
expansion is mainly due to increased investor interest in the newly included stocks in the MSCI Emerging Markets index. Ni and Gu
(2020) show that the volume of financing and financing transactions significantly increases (decreases) near the announcement date of
the MSCI Emerging Markets index expansion, while the turnover rate does not change significantly. In addition, net financing
transactions are significantly and positively correlated with the announcement effect. Overall, research on the MSCI Emerging Markets
index expansion announcement effect is limited, especially regarding whether informed trading is an important factor contributing to
the announcement effect, which should be further explored.
Compared with the existing literature, the contribution of this paper is mainly in two aspects. On the one hand, this paper examines
the long- and short-run impacts of A-share inclusion in MSCI indices on the stock market based on China’s unique institutional
environment. On the other hand, this paper further analyzes the heterogeneity of the long-term market impact of the MSCI Emerging
Markets index inclusion under different property rights characteristics.

2. Background and hypotheses

The literature on the short-term effects of capital market internationalization has shown that when a stock is included in a specific
index as an underlying stock, the market capitalization of the listed company increases significantly, the stock price rises significantly
in the short term, and the cumulative return is much higher than the average market return (Shleifer, 1986; Dhillon and Johnson, 1991;
Chang et al., 2015), a phenomenon known as the “index effect.” For example, the “index effect” refers to the rise in underlying stock
prices of Chinese A-shares due to their inclusion in the MSCI Emerging Markets Index. An important explanation for the index effect is
that a stock’s inclusion in a particular index partly reflects its future prospects, leading to changes in market demand for the stock and,
in turn, the stock price (Jain, 1987). Cai (2007) focuses on the stocks involved in changes to the S&P 500 index, as well as stocks
selected to match them by industry and size. The analysis shows that when a stock is selected for the S&P 500 index, the company’s
industry position and growth prospects are confirmed to the market, with a significant increase in share price, earnings forecasts, and
actual earnings. Matching stocks also experience an increase in share price during the window period. This suggests that the selected
indices convey positive information not only about the underlying stocks but also about their industries (Denis et al., 2003; Chan et al.,
2013). Tan and Zhu (2022) argue that the A-share market has a feedback effect whereby investment-share price sensitivity is
significantly higher for A-share listed companies in the MSCI Emerging Markets index than non-MSCI-index companies with similar
key characteristics. In addition, this effect is more pronounced among companies with low governance levels and high financing
constraints. Chu et al. (2022) focus on the short-term price performance of stocks added to or deleted from the CSI 300 Index.
Consistent with the price pressure hypothesis, they evidence a temporary change in the prices of respective added and deleted stocks,
followed by subsequent price reversions. Ni and Gu (2020) analyze the Chinese capital markets to determine the influence of including
A-shares in the MSCI Emerging Markets Index and find that the underlying stocks experience a significantly positive cumulative excess
return during the announcement window.
What exactly causes the cumulative excess returns of the underlying stocks? Merton (1987) breaks from the assumption that all
investors have the same information in the traditional capital asset pricing model and proposes the investor perception hypothesis. He
argues that investors have different information about companies and prefer to invest in stocks for which they have more information.
In addition, it is difficult to fully diversify the risk of company heterogeneity. Other things being equal, once a company is known by
more investors, the risk of company heterogeneity will be effectively diversified, which leads to a decrease in investors’ expected
payoffs and an increase in the market value of the company’s stock. The core of the investor perception hypothesis is that the
internationalization of capital markets will attract the attention of foreign analysts and institutional investors, expanding the firm’s
investor base and increasing investor perception of the firm. Several studies have used cross-sectional data to demonstrate that cu­
mulative abnormal returns (CARs) are correlated with the entry of institutional investors and that an increase in institutional investor
ownership and stock liquidity can significantly reduce a firm’s cost of capital and increase the market value of its stock (Foerster and
Karolyi, 1999; Miller et al., 1999). By analyzing data from two listings on the New York Stock Exchange and the London Stock Ex­
change, Baker et al. (2002) find negative weekly cumulative excess returns before cross-listing and positive weekly cumulative excess
returns after cross-listing. They further regress the excess cumulative returns to demonstrate that increased investor awareness can
reduce a firm’s cost of capital and increase its stock market value. Chen et al. (2019) point out that the main reason for the positive
market response to the MSCI Emerging Markets index expansion is the increased attention of investors to underlying stocks after their
inclusion in the index. This leads to the following hypotheses.
H1. : In the short term, increased institutional investor ownership relative to other listed companies can increase the cumulative
excess returns of companies whose stocks underlie the MSCI Emerging Markets index.
H2. : In the short term, increased analyst attention relative to other listed companies can increase the cumulative excess returns of
companies whose stocks underlie the MSCI Emerging Markets index.
In the long run, for a strongly efficient stock market, the lower its stock price synchronization, the more informationally efficient it
is. In fact, stock markets are not strongly efficient (Sloan, 1996; Penman and Zhang, 2002). Stock markets are markets of
information—i.e., information guides the operation of stock prices and, in turn, how resources are allocated within the stock market.
How stock prices reflect information depends on the initial stock price formation dynamics. In a less noisy stock market, individual
company information guides stock price changes—i.e., individual company information drives stock price formation. In this case, the

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lack of information transparency leads to a decrease in the individual information content in the stock price, which leads to a decrease
in the degree of individual stock price volatility and higher stock price synchronization. That is, stock price synchronization is
negatively related to information transparency, and stock price synchronization negatively reflects the information efficiency of the
stock market. In a noisy stock market, stock price fluctuations are mainly driven by noise, as there is relatively little information about
individual companies and more noise. In such a stock market, increased information transparency will reduce uncertainty about the
company’s prospects and weaken the influence of noise on stock prices, thus reducing the degree of individual stock price volatility and
increasing stock price synchronization. That is, stock price synchronization is positively related to information transparency, and stock
price synchronization positively reflects the information efficiency of the stock market (Dasgupta et al., 2010). Chu et al. (2021)
investigate the long-term impacts of index reconstitutions for stocks added to or deleted from the CSI 300 Index. They find that both
added and deleted stocks experience abnormal returns over four-year holding periods, with deleted stocks significantly outperforming
added stocks. Hao and Dong (2022) find that including A-shares in the MSCI Emerging Markets index significantly reduces
post-earnings-announcement price drift because incremental information from foreign investors improves the information absorption
efficiency of stock prices. Risk sharing by foreign investors smoothes stock return volatility, reduces the disposal effect, and improves
investors’ reactions to earnings information. In a semi-strong-form efficient market, heterogeneous information about the firm and
external noise interact, investors cannot fully discern the type of information (Xie, 2001), and noise dominates. As an emerging market,
the Chinese stock market is generally considered noisy. The Chinese stock market is largely affected by the noise of including A-shares
in the MSCI Emerging Markets Index, and stock synchronization positively reflects the information efficiency of the stock market.
Therefore, we propose the following hypothesis.
H3. : In the long run, the formal inclusion of A-shares in the MSCI Emerging Markets index will result in a significant increase in the
stock price synchronization of underlying stocks and positively reflect the information efficiency of the stock market.
Under the information superiority view, foreign investors from developed capital markets tend to be more mature and rational
(Jiang et al., 2004). These investors advocate value investing, have more professional information gathering and processing abilities,
pay more attention to the underlying stocks of listed companies, and take the initiative to invest in those companies to increase stock
liquidity. In addition, foreign investors from developed markets have important information content for other investors due to their
long-term acceptance of a mature investment philosophy. Many of these other investors follow the pace of foreign investors by
investing or repositioning in listed companies held by foreign investors, thus increasing the stock buying and selling behavior. As a
result, the liquidity of underlying stocks may increase when A-shares are included in the MSCI Emerging Markets Index. However,
under the information disadvantage view, foreign shareholders do not possess more private information about the company than
domestic investors. On the contrary, due to geographical locational, temporal, and cultural differences, foreign investors know little
about the basic characteristics and cultural customs of the host country and have relatively weak connections, making it difficult to
judge a company’s operations in the first place. As a result, A-shares are also more likely to be passive recipients and followers in terms
of investment strategy after being included in the MSCI Emerging Markets Index, with a focus on short-term stock price performance to
the detriment of stock liquidity. Therefore, the following hypothesis is proposed.
H4a. : In the long run, under the information advantage view, the inclusion of A-shares in the MSCI Emerging Markets index in­
creases the stock liquidity of the underlying stocks.
H4b. : In the long run, under the information disadvantage view, the inclusion of A-shares in the MSCI Emerging Markets index
reduces the stock liquidity of the underlying stocks.
As rational investors, foreign investors avoid companies with high information asymmetry as much as possible when making in­
vestment decisions (Florou and Pope, 2012). Therefore, the inclusion of A-shares in the MSCI Emerging Markets index increases the
exposure of foreign investors to the information disclosure behavior of the underlying companies, sending positive messages to the
market. In turn, domestic investors pay more attention to the underlying stocks and follow foreign investors to invest in them. In
addition, the opening up of China’s capital markets to the outside world affects the behavior of its capital markets information in­
termediaries. Eventually, it changes the direction of institutional investors’ attention. Increasingly, overseas securities analysts have
begun to pay attention to the A-share market after A-shares are included in the MSCI Emerging Markets index. In particular, the
underlying companies chosen by foreign investors are more likely to receive the attention of market intermediaries such as analysts,
thus helping to improve the accuracy of analysts’ surplus forecasts. Analysts’ information-gathering activities can enhance the role of
price guidance on resource allocation, thus drawing the attention of institutional investors. The combined effect of the two factors
leads to an active market, enhanced investor attention, and high investor sentiment. The following hypothesis is therefore proposed.
H5. : In the long term, there is a significant increase in investor attention following the inclusion of A-shares in the MSCI Emerging
Markets index, making its underlying stocks a popular investment.

3. Data and methods

3.1. Data

This paper selects A-share companies listed on the Shanghai and Shenzhen Stock Exchanges from 2015 to 2019 as the initial
sample, with data from the China Stock Market & Accounting Research Database (CSMAR), which is mostly used database in China
related studies (Kong et al., 2023).

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The sample screening process for the short-term index effect is as follows. The first list of 234 stocks included in the MSCI Emerging
Markets index was announced in the semiannual forecast on May 15, 2018, and the short-term window index effect is based on this
date. In this paper, we excluded four companies that did not trade their stocks on that day (ZTE, TISCO Stainless, Donghua Software,
and China Railway); 50 companies in the financial sector; 36 companies that did not trade for more than 1 week between January 1,
2018, and May 15, 2018; and two companies that had a particular transfer (PT) or special treatment (ST or *ST) in 2017. The final
sample for the short-term index effect comprised 142 companies officially included in the MSCI Emerging Markets index on May 15,
2018.
The sample selection process for long-term market responses was as follows. The first step excluded companies with the following
characteristics: in the financial sector or designated PT, ST, or *ST; missing data; negative undistributed profits in the year before
inclusion in the MSCI Emerging Markets index; and companies listed after 2018. For A-shares included in the MSCI Emerging Markets
index, newly listed companies added after June 1, 2018, or that left the index were excluded. Considering that the MSCI Emerging
Markets index includes Hong Kong stocks, A + H stocks or stocks listed in both places were excluded. Second, based on the previous
step, we take the listed companies included in the MSCI Emerging Markets index as the treatment group and refer to the stock selection
criteria of the MSCI indices to obtain the control group using the propensity score matching (PSM) method with total market capi­
talization, liquidity, growth, return on net assets, and industry sector as matching variables. Specifically, we selected the A-share
nonstandard companies with the closest scores in the year before the inclusion of A-shares in the MSCI Emerging Markets index as the
control group sample. We matched them with the treatment group using a propensity score of 1:3 and no duplicate sampling allowed,
with a caliper value of 0. 01. Finally, annual observations for 2853 companies were obtained, with 1 % and 99 % quantile tailing for all
continuous variables. Finally, we obtained annual observations for 2853 companies. To attenuate the effect of outliers, we applied 1 %
and 99 % quantile tailoring to all continuous variables.

3.2. Definition of variables

The dependent variables for the short-term stock price effects in this paper are CAR (-n, +n); the explanatory variables are INS, Ana,
and Res; and the control variables are Tot, state-owned enterprises (SOE), Leverage, BM, and ROA. The variables are defined in Table 1.

3.2.1. Cumulative abnormal return

CAR is measured in two ways in this paper. The first approach draws on the study of Ni and Gu (2020) to calculate the weighted
average excess return based on the difference between the actual stock return and the weighted average market return on the
outstanding market capitalization. The details are as follows:
Rit = (Pit − Pit− 1 )/Pit− 1 (1)
Pit is the closing price of stock i on day t, Rit is the real return of the stock, and ARit is the weighted average excess return.
For the second approach, this paper calculates the excess return based on the five-factor model proposed by Fama and French
(2015), as follows:
ri,t = αi + βi rmt + si SMBt + hi HMLt + wi RMW t + ci CMAt + εit (2)

ARit = ri,t − (αi + βi rmt + si SMBt + hi HMLt + wi RMW t + ci CMAt ) (3)

Here, ri,t and rmt denote the return on stock i and market return at time t, respectively, adjusted for the risk-free return; SMBt denotes
the risk premium due to the difference in firm size at time t; HMLt denotes the risk premium due to the difference in book-to-market
ratio at time t; RMWt denotes the difference in return between a portfolio of firms with high profitability and a portfolio of firms with
low profitability at time t; and CMAt denotes the difference in return between a portfolio of firms with a low investment level and a
portfolio of firms with a high investment level at time t.
The CAR during the window period is calculated as follows:

Table 1
Variable definitions—Short-term exponential effects.
Variables Variable meaning Variable definition

CAR(-n,+ Cumulative abnormal return Specific calculations are detailed in Eqs. (1)–(4)
n)
INS Institutional investor Ratio of the number of shares held by institutional investors to current shares for the month as of the
holdings announcement date
Ana Analyst attention Logarithm of the number of analysts tracked in the month of announcement
Res Research report attention Logarithm of the number of research reports for the month of announcement
Und MSCI stocks Dummy variables, MSCI underlying stock shares take 1, otherwise take 0
Tot Stock float size Market capitalization of the company outstanding on the date of announcement
SOE Nature of company Dummy variables, State-owned firms take 1 and other firms take 0
ownership
Leverage Debt ratio Ratio of total liabilities to total assets at the end of the previous year on the announcement date
BM Company growth Book-to-market ratio at the date of announcement and at the end of the previous year
ROA Profitability Ratio of net income to total assets at the end of the previous year on the announcement date

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∑
n
CAR（ − n, + n） = ARit (4)
− n

For the selection of window periods for the short-term event study method, CAR (− 1, 1), CAR (− 2, 2), and CAR (− 3, 3) are usually
used (Kanas, 2005; Miyajima and Yafeh, 2007).
The dependent variables for long-run market response—SYN, ILLIQ_Y, and Turnover—are shown in Eqs. (5)–(9). The explanatory
variables are Und, Post, and PD. Control variables include SIZE, TOP1, Dua, Boa, Ind, Lev, Netcash, Age, Totle, Liq, GROWTH, ROA,
and INDUSTRY. The specific definitions of the variables are given in Table 2.

3.2.2. Share price synchronization

According to Durnev et al. (2004), this paper constructs stock price synchronization metrics as follows:
ri,t = α + β1 rm,t + εi,t (5)

Here, ri,t denotes the return of firm i at moment t considering the reinvestment of cash dividends. rm,t denotes the average return of
all stocks at moment t weighted by the current market value:
( ) 2 2
s2 (ε)
R2it = 1 − RSS
TSS = 1 − β2 s2 (r )+s2 (ε)
= β2 s2β(rs )+s
(rm )
2 (ε)(6)
m m

Here, R2it represents the goodness of fit; RSS represents the residual sum of squares, which is the portion of stock price volatility that
cannot be explained by the regression model; and TSS represents the sum of squares of deviations, which is often used to reflect the
magnitude of stock price volatility. We substitute the results from Eq. (5) into Equation (6).s2 (ε) represents the return volatility caused
by firm-level information, and s2 (rm ) represents the return volatility caused by market-level information.
Considering that industry information can also have an impact on the volatility of individual stocks, we add the industry average
return weighted by the liquid market capitalization of the company, and the model expression is as follows:
ri,t = α + β1 rm,t + β2 rI,t + εi,t (7)
( ) ( )
SYN i = Ln R2i − Ln 1 − R2i (8)

Here,rI,t denotes the industry return, and the other variables are defined as described above. We use Eq. (7) to estimate R2i for
individual stocks and Eq. (8) to logarithmize R2i and calculate SYN, a measure of stock price synchronization (Wang et al., 2009). The
model not only explains the synchronization of company information with market information but also includes the correlation be­
tween industry- and company-level information. When market and industry returns explain a higher degree of individual stock returns,
the value of SYN will be larger, implying higher stock price synchronization; conversely, when SYN is smaller, stock price synchro­
nization is lower.

3.2.3. Illiquidity
Drawing on Amihud’s (2002) measure of stock illiquidity, the liquidity indicator is measured as the period average of the ratio of

Table 2
Variable definitions—Long-term market response.
Variables Symbols Variable definition

Share price synchronization SYN The calculation is detailed in Eqs. (5)–(8)

Stock liquidity ILLIQ_Y The calculation is detailed in Eq. (9)
Stock turnover rate Turnover Ratio of annual stock trading volume to shares outstanding
MSCI underlying stocks Und Dummy variable, MSCI underlying stocks take 1, otherwise take 0
Before and after the inclusion of A-shares in the MSCI Post Dummy variable, 2018 and 2019 take 1, 2016 and 2017 take 0
Emerging Markets index
Difference-in-differences (DID) statistics PD Und × POST
Company scale SIZE Logarithm of the company’s total assets at the end of the year
Major shareholder’s shareholding TOP1 Shareholding of the largest shareholder as a percentage of the total shares of the
company at the end of the year
Two positions in one Dua When the chairman and general manager are the same person, take 1, otherwise take 0
Board size Boa Logarithm of the number of the company’s board of directors
Percentage of independent directors Ind The proportion of independent directors to the total number of the company’s board of
directors
Leverage level Lev Ratio of total liabilities to total assets at the end of the year
Cash flow from operations Netcash Ratio of net cash flow from operating activities to total assets at the end of the year
Years on the market Age Logarithm after adding 1 to the number of years of company establishment
Market value Totle Ratio of total market capitalization to total assets of the company at the end of the
period
Liquidity Liq The period average of the ratio of the absolute value of the daily return on asset
transactions to the daily transaction amount
Growth GROWTH Growth rate of operating income for the period
Return on total assets ROA Ratio of net income to total assets
Industry Industry SEC 2012 Industry Classification Standards

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the absolute value of the daily return on asset transactions to the daily transaction amount, calculated as follows:
/ / /
∑N
ILLIQ Y = 1 N (|rt | (Qt 106 )) (9)
t=1

Here, rt is the daily return, Qt is the daily trading amount, and N is the number of trading days per year. A larger ILLIQ_Y indicates
an increase in stock market illiquidity and a decrease in market liquidity; conversely, a smaller ILLIQ_Y indicates a decrease in stock
market illiquidity and an increase in market liquidity.

3.3. Methods

3.3.1. Short-term index effects

To study the factors influencing CAR during the window period of A-share inclusion in the MSCI Emerging Markets index, we
constructed a cross-sectional regression model and control for sector-fixed effects. The model is as follows：
CAR( − n, + n) = β1 + β2 INS + β3 Ana + β4 Und + β5 Tot + β6 SOE + β7 Leverage + β8 BM + β9 ROA + Industry FE + ε (10)
Here, the dependent variable is the market reaction, as determined by CAR. Ana indicates analyst attention. For the benchmark
regression, the number of analysts tracked is used to measure analyst attention, and for the robustness test, analyst attention is
measured by the number of research reports.

3.3.2. Long-term market response

This paper constructs a difference-in-differences (DID) model to study the long-term market response of A-shares after their in­
clusion in MSCI indices, using A-share companies included in MSCI underlying stocks as the experimental group and non-underlying A-
share companies obtained by the PSM method as the control group:

Yit =β0 + β1 PDit + β2 Undi + β3 Postt + β4 Sizeit + β5 Top1it + β6 Duait + β7 Boait + β8 Indit + β9 Levit + β10 Netcashit
(11)
+ β11 ROAit + Industryi + Yeart + εit

where i and t represent firm and time, respectively. The coefficient of the interaction term PD can measure the market reaction after
the inclusion of A-shares in the MSCI Emerging Markets index, which is the focus of our attention. Industryi is the firm fixed effect, Yeart
is the annual fixed effect, and εit is the error term.

4. Results

4.1. Short-term index effects

Table 3 shows the descriptive statistics of short-term index effects for the full sample. The mean values of CAR (− 1, 1), CAR (− 2, 2),
and CAR (− 3, 3) are 0.001, 0.002, and 0.000, indicating that the cumulative excess return of the overall sample during the window
period tends to be close to 0 and the overall market response during the announcement period is insignificant. The minimum value of
the institutional investors’ shareholding ratio is 0.2 %, and the maximum value is 89.6 %, reflecting the obvious difference in the
shareholding ratio of institutional investors in different listed companies. The difference between the minimum and maximum values
of Ana and Res is obvious, reflecting the different degrees of analyst attention to different listed companies.
Table 4 shows the daily excess cumulative returns of the first A-shares included in the MSCI Emerging Markets Index calculated by
the market and five-factor models, respectively. The excess returns for the 3 days within the (− 1, 1) window are summed to obtain the
cumulative excess return CAR (− 1, 1) for the window period. As shown, CAR (− 1, 1) is 1.68 % (t-statistic = 5.58) for the market model
and 1.72 % (t-statistic = 5.72) for the five-factor model, indicating a significant increase in the price of the underlying stock relative to
the market before and after MSCI inclusion. The CAR (− 2, 2) calculated by the market and five-factor models for the 5-day window is

Table 3
Descriptive statistics—Short-term index effects.
Variables Observation Mean SD Min Med Max

CAR (− 1, 1) 1477 0.001 0.034 − 0.200 − 0.003 0.220

CAR (− 2, 2) 1472 0.002 0.041 − 0.263 − 0.002 0.280
CAR (− 3, 3) 1468 0.000 0.049 − 0.248 − 0.004 0.392
INS 1477 0.423 0.237 0.002 0.433 0.896
Ana 1477 2.041 1.143 0.000 2.197 4.317
Res 1477 2.630 1.368 0.000 2.773 5.533
Und 1477 0.056 0.229 0.000 0.000 1.000
To 1477 15.752 0.972 13.813 15.565 20.427
SOE 1477 0.301 0.459 0.000 0.000 1.000
Leverage 1477 0.429 0.203 0.042 0.425 0.965
BM 1477 0.003 0.007 − 0.006 0.001 0.053
ROA 1477 0.077 0.119 − 0.521 0.086 0.312

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Table 4
Exponential effects during window period.
Model Observation Window period

CAR (− 1,1) CAR (− 2,2) CAR (− 3,3)

Market model 142 0.0168 0.0120 0.0058

(5.58) (3.78) (1.38)
Five-factor model 142 0.0172 0.0173 0.0103
(5.72) (4.31) (2.46)

Notes: t statistics in parentheses; t > 1.65, t > 1.96, and t > 2.76 indicate significance at 10 %, 5 %, and 1 % confidence levels.

1.20 % (t-statistic = 3.78) and 1.73 % (t-statistic = 4.31), respectively, with the first A-share stocks included in the MSCI showing
significant excess returns over market levels during the 5-day window around the announcement date. In the longer (− 3, 3) window of
7 days, the cumulative excess return under the market model is 0.58 % (t-statistic = 1.38), which is no longer statistically significant.
The cumulative excess return under the five-factor model was 1.03 % (t-statistic = 2.46), which is still statistically significant. The
above results indicate that, first, the initial batch of underlying stocks included in MSCI indices will have significant short-term index
effects by gaining significant excess cumulative returns in the short-term window around the announcement date. Second, the trend
shows that cumulative excess returns and statistical significance levels decrease over time.
To examine the short-term index effects institutional investors and analyst attention, this study uses cross-sectional data for re­
gressions and controls for industry-fixed effects. The regression results are presented in Table 5. Column (1) shows that the coefficient
of INS is 0.0086, and the t-value is 1.97, which is significantly positive at a 5 % confidence level, but in columns (2) and (3), the
coefficient of INS is negative, and both are insignificant. This indicates that during the 3-day window of (− 1, +1), a change in
institutional investors’ holdings has a positive impact on the excess returns of stocks included in the MSCI Emerging Markets index.
However, the effect is no longer significant in the 5-day and 7-day windows. Hypothesis H1 was not tested. Ana’s regression co­
efficients are 0.0031, 0.0035, and 0.0025 and are positively statistically significant for the three window periods, indicating that the
announcement of A-share inclusion in the MSCI Emerging Markets index list increases analyst attention. The continued analyst
attention brings positive information about the company’s prospects to market investors, which makes the company more known to
investors and increases their awareness of the company, prompting them to adjust their investment decisions. Smart investors can
incorporate positive information about a company’s prospects into the stock price more quickly through trading. Hypothesis H2 was
tested.
To ensure the robustness of the results, we used research report attention as a proxy for analyst attention, and the empirical results
are presented in Table 6. The coefficients of Res are 0.0029, 0.0029, and 0.0022, respectively, and are positively statistically signif­
icant. This indicates that an increased number of research reports following the announcement of A-share inclusion in the MSCI
Emerging Markets index list can send a positive signal to the market, consistent with the findings in Table 5.

Table 5
Factors influencing short-term index effect—Institutional investor holdings and analyst attention.
Variables (1) (2) (3)
CAR (− 1, 1) CAR (− 2, 2) CAR (− 3, 3)

INS 0.0086** − 0.0044 − 0.0030

(1.97) (− 0.81) (− 0.43)
Ana 0.0031*** 0.0035*** 0.0025*
(3.36) (3.05) (1.74)
Und 0.0105*** 0.0084* 0.0070
(2.70) (1.72) (1.15)
Tot 0.0003 − 0.0008 − 0.0010
(0.22) (− 0.52) (− 0.51)
SOE − 0.0037* − 0.0010 − 0.0010
(− 1.86) (− 0.41) (− 0.33)
Leverage − 0.0096** 0.0024 − 0.0003
(− 2.05) (0.40) (− 0.04)
BM − 0.2970** − 0.3200** − 0.4473**
(− 2.57) (− 2.19) (− 2.42)
ROA 0.0329*** 0.0166* 0.0104
(4.07) (1.65) (0.83)
Constant − 0.0102 0.0093 0.0124
(− 0.54) (0.39) (0.42)
INDUSTRY_FE YES YES YES
Observations 1477 1472 1468
Adj-R2 0.067 0.019 0.009

Note: t statistics in parentheses; *p < 0.05, **p < 0.01, and ***p < 0.001；*, **, and *** denote significance at 10 %, 5 %, and 1 %
confidence levels, respectively; t-values adjusted for robustness standard deviation are in parentheses.

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S. Dong et al. Research in International Business and Finance 66 (2023) 101989

Table 6
Factors influencing short-term index effect—Institutional investor holdings and research attention.
Variables (1) (2) (3)
CAR (− 1, 1) CAR (− 2, 2) CAR (− 3, 3)

INS 0.0082* − 0.0048 − 0.0032

(1.88) (− 0.87) (− 0.48)
Res 0.0029*** 0.0029*** 0.0022*
(3.66) (2.99) (1.78)
Und 0.0106*** 0.0083* 0.0070
(2.72) (1.71) (1.15)
Tot 0.0001 − 0.0008 − 0.0011
(0.06) (− 0.50) (− 0.53)
SOE − 0.0035* − 0.0009 − 0.0009
(− 1.76) (− 0.37) (− 0.30)
Leverage − 0.0096** 0.0023 − 0.0003
(− 2.05) (0.40) (− 0.04)
BM − 0.2994*** − 0.3256** − 0.4509**
(− 2.59) (− 2.23) (− 2.44)
ROA 0.0319*** 0.0162 0.0099
(3.93) (1.60) (0.78)
Constant − 0.0080 0.0085 0.0128
(− 0.43) (0.36) (0.44)
INDUSTRY_FE YES YES YES
Observations 1477 1472 1468
Adj-R2 0.069 0.019 0.010

Note: t statistics in parentheses; *p < 0.05, **p < 0.01, and ***p < 0.001；*, **, and *** denote significance at 10 %, 5 %, and 1 %
confidence levels, respectively; t-values adjusted for robustness standard deviation are in parentheses.

4.2. Long-term market effects

4.2.1. Parallel trends hypothesis testing

A double-difference model assumes that the experimental and control groups have parallel trends, i.e., the difference between the
experimental and control groups does not change over time before the policy is implemented. This paper draws on Serfling (2016) by
setting dummy variables for parallel trends hypothesis testing. We choose the period before the inclusion point of MSCI, i.e., 2017, as
the control group, and then generate interaction terms for the experimental group dummy variables and the year dummy variables
according to the inclusion point in the MSCI Emerging Markets index and regress them as explanatory variables. The dynamic effect of
including the MSCI Emerging Markets index point in time across years is visualized in Fig. 1. The interaction terms of the experimental
group dummy variables and year dummy variables are not significantly different from zero before the inclusion of the MSCI point in

Fig. 1. Difference-in-differences parallel trends hypothesis test.

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S. Dong et al. Research in International Business and Finance 66 (2023) 101989

time, indicating that there is no significant difference between the experimental and control groups before the inclusion of the MSCI
point in time—i.e., the hypothesis of parallel trends is satisfied. The coefficients are significantly positive in the year of the MSCI
Emerging Markets index inclusion and the year following, indicating a significant positive effect from the MSCI Emerging Markets
index inclusion.
We used the PSM method to match the treatment and control groups before performing DID regression on the samples. Table 7
shows the results of the sample balance hypothesis test. It can be seen that after PSM, the difference between the experimental and
control group samples is significantly reduced, and the overall sample mean deviation is no longer significant, satisfying the balancing
hypothesis.
Descriptive statistical analysis was performed on the indicators of the experimental and control groups before and after the in­
clusion of A-shares in the MSCI Emerging Markets index. The results are shown in Table 8. From the total sample, the sample mean of
stock price synchronicity is − 0.9 but appears to improve significantly after inclusion in the MSCI Emerging Markets index. There is
also a significant increase in the share turnover rate of individual stocks before and after the MSCI Emerging Markets index inclusion.
This is a preliminary indication that A-shares are positively affected by inclusion in the MSCI Emerging Markets index.

4.2.2. Empirical results for long-term market response

The PSM–DID regression results of the long-term impact of A-share inclusion in the MSCI Emerging Markets index on China’s
capital markets are presented in Table 9. Columns 1 and 2 of Table 9 show the regression results of the impact of the inclusion of A-
shares in the MSCI Emerging Markets index on the synchronization of stock prices in China’s capital markets, where SYN1 is obtained
by regressing market returns and industry average returns to obtain R2 and then calculated according to Eq. (8), and SYN2 is obtained
by adding a one-period lagged regression of market average returns and industry average returns to obtain R2i and then calculated
according to Eq. (8). In columns (1) and (2) of Table 9, the coefficients of PD are 0.4565 and 0.1764, respectively, and are significantly
positive, at least at the 10 % statistical level, indicating that the stock price synchronization of the underlying stocks is significantly
higher after the inclusion of A-shares in the MSCI Emerging Markets index. Column 3 of Table 9 shows the regression results of the
impact of A-share inclusion in the MSCI Emerging Markets index on the stock turnover rate of China’s capital market. The coefficient of
PD is 1.3721, which is significantly positive at the 1 % confidence level, indicating that the inclusion of A-shares in the MSCI Emerging
Markets index can increase the annual turnover rate of the underlying stocks. There are two main reasons for the increase in stock price
synchronicity and the turnover rate of MSCI-included underlying stocks. First, after shares are included in the MSCI Emerging Markets
index, foreign media and analysts focus on the underlying stocks, which can signal to the market that the underlying company has a
good outlook. Thus, investor awareness of the underlying stocks increases, leading to increased investment in the underlying stocks.
Second, the entry of overseas institutional investors changes the investor structure, stimulating domestic analysts and institutional
investors to improve their professionalism and learn from mature foreign investors. In addition, Chinese investors are mainly indi­
vidual investors. Individual investors typically show “herd behavior” and adopt a follow-through strategy that makes the overall stock
price of the underlying stock more synchronized and positively reflects the information efficiency of the underlying stock. Ultimately,
the underlying stock becomes more active in the market and changes hands rapidly.
Column 4 of Table 9 shows the regression results of the impact of A-share inclusion in the MSCI Emerging Markets index on stock
liquidity in China’s capital markets. The coefficient of PD is − 0.0030, statistically insignificant at all levels, indicating that the un­
derlying stocks included in the MSCI Emerging Markets index do not increase stock liquidity due to the attention of foreign analysts
and the entry of institutional investors. The liquidity hypothesis suggests that increasing volume and reducing bid–ask spreads are
ways to increase liquidity, which can reduce transaction costs and increase firm value (Foerster and Karolyi, 1998). Further examining
the impact of A-share inclusion in MSCI on volume (Num) and bid–ask spread (Diff), the coefficient of PD in column (5) is 0.0643,
which is statistically insignificant, indicating that A-share inclusion in MSCI has no significant impact on the volume of underlying
stocks. The coefficient of PD in column (6) is − 0.2923, which is significantly negative at the 5 % statistical level, indicating that

Table 7
Balanced hypothesis testing.
Panel A Equilibrium testing of matching variables

Variables Unmatched (U) Mean % % T-test

Matched (M) Treated Control Standardized bias Bias reduction rate T-value P > |t|

Totle U 17.943 15.815 262.3 26.03 0.000

M 17.729 17.743 − 1.8 99.3 − 0.12 0.906
Liq U 0.005 0.390 − 29.4 − 2.13 0.033
M 0.006 0.005 0.0 99.9 0.90 0.371
Growth U 0.003 0.004 − 22.4 − 1.87 0.062
M 0.002 0.002 7.4 66.9 0.67 0.504
ROE U 0.123 0.074 60.6 5.43 0.000
M 0.123 0.137 − 17.4 71.3 − 0.99 0.322
Panel B Test for bias from overall sample mean
Sample R2 chi2 P > chi2 Mean bias Median bias
Unmatched 0.596 506.33 0.000 20.7 10.6
Matched 0.052 11.27 1.000 7.1 5.5

Notes: p > 0.1, p > 0.05, and p > 0.01 indicate significance at 10 %, 5 %, and 1 % confidence levels, respectively.

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S. Dong et al. Research in International Business and Finance 66 (2023) 101989

Table 8
Sample descriptive statistics.
Variables 2016–2017 2018–2019

(1) (2) (3) (4) (5)

Allsample (N = 2852) Treatmentgroup (N = 468) Controlgroup (N = 958) Treatmentgroup (N = 468) Controlgroup (N = 958)

Explained variables
SYN1 − 0.9(1.41) − 1.4(1.67) − 1.3(1.67) − 0.6(0.96) − 0.5(0.91)
ILLIQ_Y 0.01(0.01) 0.01(0.00) 0.01(0.01) 0.01(0.01) 0.01(0.01)
Turnover 3.52(3.12) 2.08(2.11) 3.70(2.85) 2.18(2.21) 4.15(3.69)
Mediating variables
PD 0.11(0.32) 0.00 (0.00) 0.00(0.00) 1.00(0.00) 0.00(0.00)
Und 0.23(0.42) 1.00(0.00) 0.00(0.00) 1.00(0.00) 0.00(0.00)
Post 0.05(0.05) 0.00(0.00) 0.00 (0.00) 1.00(0.00) 1.00(0.00)
Control variables
SIZE 24.0(1.20) 24.7(1.22) 23.7(1.01) 24.9(1.21) 23.9(1.10)
TOP1 0.37(0.15) 0.42(0.16) 0.36(0.15) 0.41(0.15) 0.35(0.15)
Dua 0.21(0.41) 0.07(0.26) 0.27(0.44) 0.08(0.27) 0.23(0.42)
Boa 2.19(0.22) 2.24(0.23) 2.17(0.21) 2.24(0.22) 2.17(0.22)
Ind 0.38(0.06) 0.38(0.06) 0.38(0.06) 0.39(0.06) 0.38(0.06)
Lev 0.50(0.20) 0.53(0.19) 0.48(0.19) 0.52(0.19) 0.49(0.19)
Netcash 0.07(0.07) 0.06(0.07) 0.06(0.07) 0.07(0.07) 0.07(0.06)
ROA 0.05(0.07) 0.05(0.05) 0.06(0.06) 0.06(0.06) 0.05(0.07)

Notes: Sample standard deviation in parentheses; ***, **, and * denote 1 %, 5 %, and 10 % significance levels, respectively, and indicate the sig­
nificance of t-test differences between the two groups.

Table 9
Long-term market reaction.
Variables (1) (2) (3) (4) (5) (6)
SYN1 SYN2 Turnover ILLIQ_Y Num Diff

PD 0.4457*** 0.1764* 1.3721*** − 0.0030 0.0643 − 2.9230**

(3.00) (1.81) (3.28) (− 0.16) (0.70) (− 2.15)
Und − 0.4145*** − 0.1514** − 0.9289** 0.0108 − 0.0880 1.9729*
(− 3.70) (− 2.06) (− 2.28) (0.75) (− 1.28) (1.92)
Post − 0.4982*** − 0.4367*** − 1.5472*** − 0.0079 − 0.0968** 8.3021***
(− 7.88) (− 10.54) (− 8.59) (− 0.97) (− 2.49) (14.35)
SIZE 0.1581*** 0.1537*** − 1.4263*** − 0.0219*** 0.3596*** 0.8700***
(5.66) (8.40) (− 12.77) (− 6.12) (20.95) (3.40)
TOP1 − 0.2971* − 0.0519 − 1.2260* 0.0631*** − 1.2261*** − 0.9825
(− 1.80) (− 0.48) (− 1.84) (2.99) (− 12.06) (− 0.65)
Dua 0.0252 − 0.0225 0.1001 0.0077 − 0.0389 − 0.5392
(0.46) (− 0.62) (0.49) (1.08) (− 1.14) (− 1.06)
Boa 0.3334** 0.2973*** − 0.6741 0.0279 − 0.0698 − 0.2050
(2.34) (3.18) (− 1.23) (1.53) (− 0.80) (− 0.16)
Ind − 0.0944 0.4056 − 1.4354 0.0187 − 0.0970 − 7.8912*
(− 0.19) (1.26) (− 0.79) (0.30) (− 0.32) (− 1.76)
Lev − 0.4955*** − 0.4770*** 2.0703*** 0.0078 − 0.1417 0.6151
(− 3.07) (− 4.50) (3.31) (0.38) (− 1.43) (0.42)
Netcash − 0.4068 − 0.1037 − 0.7306 − 0.0774* 0.2342 9.8321***
(− 1.18) (− 0.46) (− 0.66) (− 1.75) (1.10) (3.11)
ROA − 0.7501*** − 0.4966*** − 0.5292 0.0286 − 0.8718*** 4.1355**
(− 3.39) (− 3.42) (− 0.76) (1.01) (− 6.41) (2.04)
Constant − 4.7134*** − 4.0833*** 39.5227*** 0.4731*** 14.4700*** − 21.1894***
(− 7.09) (− 9.36) (14.85) (5.56) (35.36) (− 3.48)
INDUSTRY_FE YES YES YES YES YES YES
Year_FE YES YES YES YES YES YES
Observations 2852 2852 2852 2852 2852 2852
Adj-R2 0.253 0.302 0.248 0.066 0.548 0.158

Notes: t statistics in parentheses; *p < 0.05, **p < 0.01, and *** p < 0.001; ***, **, and * denote 1 %, 5 %, and 10 % significance levels, respectively;
robustness standard deviation-adjusted t-values are in parentheses.

A-shares included in the MSCI Emerging Markets index see a significant reduction in their bid–ask spreads. Our findings concerning
stock liquidity are consistent with those of Domowitz et al. (1998). These two factors lead to no significant change in the stock liquidity
of the underlying stocks of China’s A-shares after their inclusion in MSCI. On the one hand, there is weak information connectivity and
limited access to private information about companies by foreign investors due to geographical and cultural differences. On the other
hand, there are monetary limits for foreign investors investing in the A-share market.

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S. Dong et al. Research in International Business and Finance 66 (2023) 101989

Table 10
Heterogeneity analysis of long-term market responses.
Variables (1) (2) (1) (2) (1) (2)
SOE= 0 SOE= 1 SOE= 0 SOE= 1 SOE= 0 SOE= 1
SYN1 SYN1 ILLIQ_Y ILLIQ_Y Turnover Turnover

PD 0.5386** 0.3039 0.0067 − 0.0163*** 2.0270** 0.7569*

(2.37) (1.54) (0.18) (− 5.35) (2.49) (1.68)
Und − 0.5293*** − 0.2457 0.0136 0.0083*** − 0.9352 − 0.8196**
(− 3.09) (− 1.60) (0.49) (3.50) (− 1.52) (− 2.33)
Post − 0.5923*** − 0.3211*** − 0.0190 0.0167*** − 1.9565*** − 0.6935***
(− 7.34) (− 3.14) (− 1.45) (10.56) (− 6.75) (− 2.97)
SIZE 0.1531*** 0.1436*** − 0.0332*** − 0.0076*** − 1.5612*** − 1.2669***
(4.03) (3.13) (− 5.38) (− 10.76) (− 11.44) (− 12.08)
TOP1 − 0.4434** − 0.4554 0.0929** 0.0140*** − 0.6834 − 1.2878*
(− 1.98) (− 1.55) (2.55) (3.10) (− 0.85) (− 1.92)
Dua 0.0181 0.2593* 0.0068 0.0003 0.2758 − 0.0461
(0.28) (1.93) (0.66) (0.13) (1.21) (− 0.15)
Boa 0.1515 0.3509 0.0452 0.0004 − 0.2306 − 1.7295***
(0.70) (1.63) (1.29) (0.13) (− 0.30) (− 3.52)
Ind 0.0217 − 0.6569 0.0090 0.0099 − 1.7026 − 1.4504
(0.03) (− 0.86) (0.08) (0.83) (− 0.68) (− 0.83)
Lev − 0.5239** − 0.4480 0.0177 0.0127*** 1.6625** 4.2503***
(− 2.49) (− 1.61) (0.52) (2.95) (2.20) (6.69)
Netcash − 0.2403 − 0.1813 − 0.1223* − 0.0194** − 3.7390** 1.6645
(− 0.56) (− 0.29) (− 1.74) (− 2.01) (− 2.41) (1.17)
ROA − 0.5847** − 1.2391** 0.0450 − 0.0271*** − 0.8323 1.3962
(− 2.29) (− 2.48) (1.08) (− 3.52) (− 0.91) (1.23)
Constant − 4.3637*** − 4.0987*** 0.7316*** 0.1746*** 42.3797*** 36.4179***
(− 4.49) (− 3.87) (4.63) (10.69) (12.14) (15.07)
INDUSTRY_FE YES YES YES YES YES YES
Year_FE YES YES YES YES YES YES
Observations 1761 1092 1761 1092 1761 1092
Adj-R2 0.234 0.321 0.070 0.618 0.255 0.390

Notes: t statistics in parentheses; *p < 0.05, **p < 0.01, and *** p < 0.001; ***, **, and * denote 1 %, 5 %, and 10 % significance levels, respectively;
robustness standard deviation-adjusted t-values are in parentheses.

4.2.3. Heterogeneity analysis of long-term market response

Since the shareholder composition of Chinese SOEs and private firms is significantly different, and the regulators are also different,
this paper further examines whether the long-term impact of A-share inclusion in the MSCI Emerging Markets index on the stock
market differs depending on the nature of property rights. We divide the sample into SOEs (defined as SOE = 1) and non-state-owned
enterprises (defined as SOE = 0) based on the nature of enterprise ownership, and the regression results are presented in Table 10.
In column (1), the coefficient of PD is 0.5386, which is significantly positive at the 1 % statistical level, while in column (2), the
coefficient of PD is statistically insignificant. This indicates that after the inclusion of A-shares in MSCI, for the underlying stocks, the
non-SOEs that are part of the underlying stocks are more vulnerable to this inclusion event. Non-SOEs are mainly retail investors who
are unable to interpret the information themselves and have a “functional lock-in” to the stock (Hand, 1990). The focus of overseas
analysts and the entry of institutional investors allow for better use of company information, which is transmitted to individual in­
vestors through market signals, leading to a shift toward rational investment behavior and an overall convergence of underlying stock
investments, which can significantly improve the stock price synchronization of non-SOEs. For SOEs, in the case of state-controlled
enterprises, more information is transmitted to the market to enhance the transparency of the company’s idiosyncratic informa­
tion. The change in share price is more reflective of the company’s true value and little affected by noise, so the synchronization of SOE
share prices is not significantly changed after the inclusion of shares in the MSCI Emerging Markets index.
The PD coefficient in column (3) is 2.0270 and significantly positive at the 5 % statistical level, while the coefficient of PD in column
(4) is 0.7569 and significantly positive at the 10 % statistical level, indicating that the inclusion of A-shares in the MSCI Emerging
Markets index will increase the annual turnover rate of both SOEs and non-SOEs. The PD coefficient in column (5) is 0.0067 but
insignificant, while the PD coefficient in column (6) is − 0.0163 and significantly negative at the 1 % statistical level, indicating that the
inclusion of A-shares in the MSCI Emerging Markets index can significantly increase SOE stock liquidity. SOEs have good and sus­
tainable business conditions relative to non-SOEs, a higher degree and quality of information disclosure, and better corporate
governance mechanisms, which facilitate information mining by foreign investors and improve the quality of information connection,
thus improving stock liquidity.

5. Conclusion

This paper assesses the short-term index effects and long-term market reaction to the inclusion of A-shares in the MSCI Emerging
Markets Index. From the perspective of the short-term index effect, the underlying stocks gain cumulative excess returns during the
three, five, and seven window periods before and after the announcement date of A-share inclusion in the MSCI Emerging Markets

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S. Dong et al. Research in International Business and Finance 66 (2023) 101989

index on May 15, 2018, reflecting a positive signal to the market and presenting a significant index effect. Further examination reveals
that for the underlying stocks, institutional investors’ holdings can positively influence excess stock returns and convey information
about the quality of the underlying stocks in a short period. Analyst attention shows a persistence for cumulative excess returns,
although significantly decreasing, supporting the investor awareness hypothesis. Through the long-term market response, the stock
price synchronization of underlying stocks significantly improves after A-shares are formally included in the MSCI Emerging Markets
index. This improvement reflects the convergence phenomenon in the Chinese A-share market in the presence of noise and the in­
formation disadvantage view of individual investors; the stock price synchronization can positively reflect the information efficiency of
the stock market, and the heterogeneity analysis shows that non-state enterprises show stronger stock price synchronization. For stock
liquidity, the heterogeneity analysis suggests that inclusion in the MSCI Emerging Markets index promotes SOE stock liquidity, as the
quality of information connectivity and investment restrictions for foreign investors do not have significant effects. Overall, the in­
clusion of A-shares in MSCI indices can convey a positive index effect to the market in the short term, reflecting the “high-quality”
future outlook of the underlying stocks. In the long run, it can improve market quality by influencing stock market synchronization and
liquidity, turnover rate, and other factors.
Based on the results of the empirical study, we suggest that emerging market countries should actively internationalize their capital
markets, introduce foreign investors, increase investor awareness, and improve their capital market structures.

Data availability

The authors do not have permission to share data.

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