Government Stock Purchase Undermines Price Informativeness: Evidence from China’s “National Team”

Abstract

We use the 2015 Chinese stock market crash to study the effects of government stock purchases. The Chinese government purchased stocks to stabilize the markets through state-owned financial institutions known as the “National Team.” We find that the intervention led to reduced volatility and price informativeness. These impacts are driven by the disclosure of government portfolios. Consistent with investors having a stronger incentive to acquire government intervention information instead of fundamental news, we find reduced information production and information asymmetry following intervention disclosure. The article suggests that government stock purchases involve a trade-off between stability and informational efficiency.

The Estimation of Risk Premia with Omitted Variable Bias: Evidence from China

“…Restrictions on events such as derivative trading, options trading, and share repurchasing of the firms lead to the lack of such microstructure factors (e.g., the option-to-stock volume ratio factor by Johnson and So 2012; the share repurchases factor by Ikenberry et al 1995, among others). Last but not least, the stock market in China is intensively intervened by the government (Brunnermeier et al 2022;Dang et al 2023), which also contributes to the cross-sectional return of the stock. Since government intervention is unobservable 2 , such a factor is also inevitably omitted.…”