Administrative division adjustments and stock price comovement : evidence from the city-county mergers in China

Under the background of Chinese market segmentation, whether government-led administrative division adjustments can promote regional economic integration is a practical issue. Taking interregional firms’ stock price comovement as a micro measurement of regional integration, this paper investigates the regional integration effect of administrative division adjustments, i.e., city-county mergers. We find that stock price comovement between county-level and municipal district-level firms in the merged counties and municipal districts significantly improve after city-county mergers, particularly in regions with a higher degree of market segmentation and lower degree of marketization. We further find that the increase in stock price comovement caused by city-county mergers emerges from the increase in comovement of real activities between firms in the merged counties and municipal districts. Taken together, our results suggest that government-led administrative division adjustments effectively promote regional integration.