Information asymmetry, market segmentation, and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares
AbstractIn 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.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Research Paper with number 9820.
Date of creation: 1998
Date of revision:
Other versions of this item:
- Chakravarty, Sugato & Sarkar, Asani & Wu, Lifan, 1998. "Information asymmetry, market segmentation and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 325-356, December.
- NEP-ALL-1998-10-15 (All new papers)
- NEP-CFN-1998-10-15 (Corporate Finance)
- NEP-FMK-1998-10-15 (Financial Markets)
- NEP-IFN-1998-10-15 (International Finance)
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