Demand Curves for Stocks Slope Down in the Long Run: Evidence from the Chinese Split-Share Structure Reform

Critical Finance Review forthcoming

PBCSF-NIFR Research Paper

53 Pages Posted: 10 Aug 2016 Last revised: 24 Feb 2021

See all articles by Clark Liu

Clark Liu

Tsinghua University - PBC School of Finance

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: February 17, 2021

Abstract

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

Liu, Clark and Wang, Baolian, Demand Curves for Stocks Slope Down in the Long Run: Evidence from the Chinese Split-Share Structure Reform (February 17, 2021). Critical Finance Review forthcoming, PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=2819687 or http://dx.doi.org/10.2139/ssrn.2819687

Clark Liu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Baolian Wang (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

314 Stuzin Hall
Gainesville, FL 32611
United States

HOME PAGE: http://www.wangbaolian.com

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