Demand Curves for Stocks Slope Down in the Long Run: Evidence from the Chinese Split-Share Structure Reform
Critical Finance Review forthcoming
53 Pages Posted: 10 Aug 2016 Last revised: 24 Feb 2021
Date Written: February 17, 2021
This paper uses China’s Split-Share Structure Reform to study the slope of long-term demand curves. The reform increased local A-share float but did not affect foreign B-share float. Across firms, larger increases in A-share float lead to larger decreases in A-share price relative to B-share price, even up to around ten years after the reform, suggesting that demand curves slope down in the long run. Larger increases in float also lead to larger decreases in turnover and volatility, and demand curves are steeper when the divergence of opinion is greater, consistent with the theory modeling investors with heterogeneous beliefs.
Keywords: Long-Term Demand Curve; Divergence of Opinion; Split-Share Structure Reform; A/B Share; Lack of Substitutes
JEL Classification: G02; G12; G15
Suggested Citation: Suggested Citation