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Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount

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  • KALOK CHAN
  • ALBERT J. MENKVELD
  • ZHISHU YANG

Abstract

We examine the effect of information asymmetry on equity prices in the local A- and foreign B-share market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross-sectional variation in B-share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid-ask spread in the A- and B-share markets explains 44% and 46% of the variation in B-share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables. Copyright 2008 by The American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 63 (2008)
Issue (Month): 1 (02)
Pages: 159-196

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Handle: RePEc:bla:jfinan:v:63:y:2008:i:1:p:159-196

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