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

Journal of International Financial Markets

Posted: 1 Sep 1998

See all articles by Sugato Chakravarty

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

Abstract

In the Chinese stock markets, foreign class B shares trade at an average discount of about 60 percent to the prices at which domestic A shares trade. We develop a simple model, incorporating both asymmetric information and market segmentation, to explain the relative pricing of A shares and B shares. Our model predicts that the former effect leads to discounts for B shares, while the latter effect implies a premium. Finally, we show theoretically that introduction of an index security on the domestic A shares, that can be traded by foreign investors, improves the liquidity of the B share market. Our empirical results indicate that the information asymmetry hypothesis provides a significant, though partial, explanation as to why the B shares consistently trade at lower prices than the A shares.

Note: This is a description of the paper and is not the actual abstract.

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. Journal of International Financial Markets. Available at SSRN: https://ssrn.com/abstract=120929

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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