Market Liquidity and Price Disparity: Evidence from Chinese Cross-Listed Firms

Abstract

This study investigates the association between stock liquidity and the H-share discount using a sample of Chinese cross-listed stocks in A- and H-shares markets. We examine the liquidity hypothesis by employing depth and trading activity variables. Our results suggest that stocks with a higher level in depth (active trading) of A-shares relative to H-shares are associated with less (more) H-share discount. Such effect is more pronounced in stocks that are non-state-owned and with low product market competition and ownership concentration. Moreover, we provide supportive evidence that the Stock Connect Program introduced in 2015 significantly dampens the association between stock liquidity and H-share discount. Overall, our findings highlight that cross-listed stocks' liquidity differences explain a large proportion of variation in price disparity and identify the stock-specific factors affecting the price disparity.

Keywords: market liquidity, price disparity, the law of one price

JEL Classification: C53, G12, G17