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

See all articles by Sugato Chakravarty

Sugato Chakravarty

Krannert School of Management

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

Krannert School of Management ( email )

Purdue University
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Asani Sarkar (Contact Author)

Federal Reserve Bank of New York ( email )

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

Lifan Wu

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

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United States
213-343-2870 (Phone)