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

  • Chakravarty, Sugato
  • Sarkar, Asani
  • Wu, Lifan

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.

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Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 8 (1998)
Issue (Month): 3-4 (December)
Pages: 325-356

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Handle: RePEc:eee:intfin:v:8:y:1998:i:3-4:p:325-356
Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

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