Report

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.

Keywords: Stock market - China; Stock - Prices - China; China;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Research Paper

Publication Date: 1998

Number: 9820