Does Capital Market Opening Restrain Corporate Leverage Manipulation? Evidence from Mainland-Hong Kong Stock Connect

Enterprises engage in deceptive deleveraging by employing leverage manipulation such as non-share-real-debts and off-balance-sheet liabilities, which contravenes the original intent of deleveraging policies. Thus, effectively suppress corporate leverage manipulation is of great significance for promoting high-quality economic development in China. Using the implementation of Mainland-Hong Kong Stock Connect policy as an exogenous shock, we construct a difference-in-differences model to examine the impact of capital market opening on corporate leverage manipulation behavior. The findings reveal that capital market opening significantly inhibits corporate leverage manipulation. Mechanism analysis indicates that capital market opening primarily restrains leverage manipulation through financing effects, information effects, and governance effects. Heterogeneity analysis shows that this inhibitory effect is more pronounced in firms with higher separation rates between ownership and control, lower equity checks and balances, higher information asymmetry, non-state-owned enterprises, and firms with better growth potential. Tests on economic consequences demonstrate that when an enterprise becomes a target firm of the Stock Connect program, engaging in leverage manipulation leads to a higher probability of receiving a non-standard audit opinion from auditors.