Information Asymmetry, Market Segmentation and the Pricing of Cross-listed Shares: Theory and Evidence From Chinese A and B Shares

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Research Papers

Information Asymmetry, Market Segmentation and the Pricing of Cross-listed Shares: Theory and Evidence From Chinese A and B Shares

August 1998 Number 9820

JEL classification: G12, G14, G15

Authors: Sugato Chakravarty, Asani Sarkar, and Lifan Wu

In contrast to most other countries, Chinese foreign class Bshares trade at an average discount of about 60 percent to the prices at which domestic Ashares trade. We argue that one reason for the large price discount of B shares is because foreign investors have less information on Chinese stocks than domestic investors. We develop a model, incorporating both informational asymmetry and market segmentation, and derive a relative pricing equation for A shares and B shares. We show theoretically that an A share index security, tradable by foreigners, increases the liquidity of B shares. Our empirical study of Chinese stocks supports the predictions of our model. Specifically, we show that our model-based proxies for informational asymmetry explain a significant portion of the cross-sectional variation of the B share discounts.

Available only in PDF PDF

47 pages / 196 kb

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