Information asymmetry, market segmentation and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares

Abstract

In contrast to most other countries, Chinese foreign class B shares trade at an average discount of about 60 percent to the prices at which domestic A shares trade. We argue that one reason for the large price discount of B shares is because foreign investors have less information on Chinese stocks than domestic investors. We develop a model, incorporating both informational asymmetry and market segmentation, and derive a relative pricing equation for A shares and B shares. We show theoretically that an A share index security, tradable by foreigners, increases the liquidity of B shares. Our empirical study of Chinese stocks supports the predictions of our model. Specifically, we show that our model-based proxies for informational asymmetry explain a significant portion of the cross-sectional variation of the B share discounts.

Panel cointegration of Chinese A and B shares

“…Under this scheme domestic institutional investors authorised by the government can invest in overseas capital markets under the foreign exchange control system in China. 2 The P/E ratio is very high for some …rms. It indicates that there may be problems with the acounting data for these …rms.…”

“…Table 4 reports descriptive statistics for the explanatory variables. 2 Finally, the probit models include a stock exchange dummy variable (DSE) and industry dummy variables. Table 5 reports the probit estimates.…”

The Chinese Stock Market: A Casino with 'Buffer Zones'?

“…Existing empirical work on the Chinese stock market has focussed exclusively either on explaining the apparent puzzle of lower prices in the B-share than in the A-share segment of the market (Chakravarty et al, 1998;Fernald and Rogers, 1998;Gordon and Li, 1999;Su, 2000;Sjö ö and Zhang, 2000) or on modelling day-of-theweek effects (Tsui and Yu, 1999;Chen et al, 2001). Even though the high volatility during certain periods in the A-share market has been considered by some of the above researchers, none of them has tried to distinguish between different regimes.…”

A tale of two prices: Liquidity and asset prices in multiple markets

“…Many of the papers in this literature investigate the differences in pricing between the ADR and the underlying share, and thus indirectly seek to explain the premium in relation to macroeconomic factors and the degree of segmentation/integration between the home and ADR market. See, for example, Rosenthal and Young (1990), Kato, Lin, and Schallheim (1991), Wahab, Lashgari, and Cohn (1992), Park and Tavokkol (1994), Miller and Morey (1996), Chakravarty, Sarkar, and Wu (1998), Foerster and Karolyi (1999), Dabora and Froot (1999), Grammig, Melvin, andSchlag (2001, 2005), Eun and Sabherwal (2002), Karolyi and Li (2003), De Jong, Rosenthal, and van Dijk (2004), Doidge, Karolyi, and Stulz (2004), Gagnon and Karolyi (2003), Suh (2003), Menkveld, Koopman, and Lucas (2003), Karolyi (2004), Bailey, Karolyi, and Salva (2005), Blouin, Hail, and Yetman (2005).…”