Information Asymmetry, Market Segmentation, and the Pricing of Cross-Listed Shares: Theory and Evidence from Chinese A and B Shares

47 Pages Posted: 31 Aug 1998  

Sugato Chakravarty

Purdue University

Asani Sarkar

Federal Reserve Bank of New York

Lifan Wu

California State University, Los Angeles - Department of Finance and Law

Multiple version iconThere are 2 versions of this paper

Date Written: July 1998

Abstract

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.

JEL Classification: G12, G14, G15

Suggested Citation

Chakravarty, Sugato and Sarkar, Asani and Wu, Lifan, Information Asymmetry, Market Segmentation, and the Pricing of Cross-Listed Shares: Theory and Evidence from Chinese A and B Shares (July 1998). Available at SSRN: https://ssrn.com/abstract=115770 or http://dx.doi.org/10.2139/ssrn.115770

Sugato Chakravarty

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

Asani Sarkar (Contact Author)

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

Lifan Wu

California State University, Los Angeles - Department of Finance and Law ( email )

5151 State University Dr
Los Angeles, CA 90032
United States
213-343-2870 (Phone)

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