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A (partial) resolution of the Chinese discount puzzle

Author

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  • G. Andrew Karolyi
  • Lianfa Li
  • Rose Liao

Abstract

Purpose - The purpose of this paper is to examine the changes inB‐share discounts across 76 Chinese stocks around an important regulatory event to understand the importance of political risk in pricing stocks in emerging markets. Design/methodology/approach - On February 19, 2001, the Chinese Securities Regulatory Commission announced that Chinese residents would be allowed to ownB‐share classes of stocks traded on both the Shanghai and Shenzhen stock markets. These share classes were previously restricted to foreign investors while domestic residents were only permitted to holdA‐share classes of stock and were typically priced at a significant discount. This regulatory change triggered a dramatic decline of prevailingB‐share discounts from 80 percent down to 40 percent. Findings - The paper finds that the largest declines in theB‐share discounts around this regulatory event are concentrated in the firms with low government ownership stakes and are unrelated to the firms' risks, relative supplies of shares outstanding and liquidity attributes. Research limitations/implications - This surprising finding challenges the current wisdom about what influences theB‐share discount and particularly the role of political risk in explaining the discount puzzle. Originality/value - The paper offers an alternative interpretation for theB‐share discount puzzle. The findings have important implications for China's future financial liberalization policies.

Suggested Citation

  • G. Andrew Karolyi & Lianfa Li & Rose Liao, 2009. "A (partial) resolution of the Chinese discount puzzle," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 1(1), pages 80-106, April.
    • Handle: RePEc:eme:jfeppp:v:1:y:2009:i:1:p:80-106
    DOI: 10.1108/17576380910962394
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    Citations

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    Cited by:

    1. Li, Yuan & Ran, Jimmy, 2020. "Investor Sentiment and Stock Price Premium Validation with Siamese Twins from China," Journal of Multinational Financial Management, Elsevier, vol. 57.
    2. Doukas, John A. & Wang, Liu, 2013. "Information asymmetry, price discovery, and the Chinese B-share discount puzzle," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1116-1135.
    3. Zheng, Yao & Osmer, Eric & Zheng, Liancun, 2018. "The relative pricing of cross-listed securities: The case of Chinese A- and H-share," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 297-310.
    4. Fan, Longzhen & Hu, Bill & Jiang, Christine, 2012. "Pricing and information content of block trades on the Shanghai Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 20(3), pages 378-397.
    5. Tong, Wilson H.S. & Yu, Wayne W., 2012. "A corporate governance explanation of the A-B share discount in China," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 125-147.
    6. Cai, Weixing & Lee, Edward & Xu, Alice Liang & Zeng, Cheng (Colin), 2019. "Does corporate social responsibility disclosure reduce the information disadvantage of foreign investors?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 34(C), pages 12-29.
    7. Bai, Ye & Chow, Darien Yan Pang, 2017. "Shanghai-Hong Kong Stock Connect: An analysis of Chinese partial stock market liberalization impact on the local and foreign markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 182-203.
    8. Yuan Li & Yu Zhang, 2021. "Investor Sentiment, Idiosyncratic Risk, and Stock Price Premium: Evidence From Chinese Cross-Listed Companies," SAGE Open, , vol. 11(2), pages 21582440211, June.

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