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

  • Sugato Chakravarty
  • Asani Sarkar
  • Lifan Wu

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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Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9820.

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Date of creation: 1998
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Handle: RePEc:fip:fednrp:9820
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