Depoliticization and market efficiency: Evidence from China

•Price synchronicity declines after firms lose political connections.•The effect is stronger for firms located in areas with higher marketization.•A quasi-natural experiment confirms the decline in synchronicity.•Public exposure of firm misconducts is a channel for reducing synchronicity. We investigate changes in stock price efficiency for politically connected corporations in China. Results show that price synchronicity, an inverse measure of price efficiency, declines significantly when firms lose political connections. This effect is more pronounced for firms headquartered in areas with higher marketization. Using the release of Regulation-18 as a quasi-natural experiment, we find that post Regulation-18, synchronicity declined across firms with the effect of depoliticization becoming, 11% stronger. We identify public exposure of firm misconducts as a channel for depoliticization reducing synchronicity because firms are more likely to get publicly exposed for misconducts after depoliticization.