We explores whether a tightening regulation on shadow banking in China improves finance market pricing efficiency by examining its impact on idiosyncratic risk. Using a quasi-natural experiment as an exogenous shock, by analyzing the effects of New Asset Management Regulation implemented in 2018 and using a Difference-in-Differences approach with A-share stocks from 2007 to 2021, we find that listed firm's idiosyncratic risk constrained significantly. A series of robustness and endogeneity tests confirm this finding. Our channel analysis shows that such policy improve listed firm's information disclosure quality. The cross-sectional tests show the implementation effect is more pronounced in companies with poorer corporate governance, weaker external oversight, and smaller investment and market values. The paper provides new empirical evidence on the economic consequences of shadow banking activities and offers some policy implications for the regulation of shadow banking.