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
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: Suggested Citation