A Resolution of the Chinese Discount Puzzle

Dice Center Working Paper No. 2003-34

38 Pages Posted: 31 Dec 2003

See all articles by George Andrew Karolyi

George Andrew Karolyi

Cornell University - Samuel Curtis Johnson Graduate School of Management

Lianfa Li

China International Capital Corporation

Date Written: December 2003

Abstract

On February 19, 2001, the Chinese Securities Regulatory Commission announced that Chinese residents would be allowed to own B-share classes of stocks traded on both the Shanghai and Shenzhen stock markets. These share classes were previously restricted to foreign investors while domestic residents were only permitted to hold A-share classes of stock. This regulatory change triggered a dramatic decline of prevailing B-share discounts of 75 percent down to 8 percent. We examine the changes in B-share discounts across 75 stocks and how they relate to fundamental attributes of the stocks in order to distinguish among various hypotheses that have been put forward for the existence of the so-called Chinese discount puzzle. That is, why B shares are traded at discount rather than at usual premium. We find that the decline in the B-share discount around this regulatory event is concentrated in small capitalization stocks and those with substantial past-return momentum and is unrelated to the firm's risk and liquidity attributes.

JEL Classification: F30, G32, G15

Suggested Citation

Karolyi, George Andrew and Li, Lianfa, A Resolution of the Chinese Discount Puzzle (December 2003). Dice Center Working Paper No. 2003-34. Available at SSRN: https://ssrn.com/abstract=482487 or http://dx.doi.org/10.2139/ssrn.482487

George Andrew Karolyi

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Lianfa Li

China International Capital Corporation ( email )

28th Floor, China World Tower 2
No. 1 Jian Guo Men Wai Avenue
Beijing 100004
China

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