Asset pricing and price differentials in China's A-share and B-share equity markets
Two classes of shares exist in China's equity markets: A-shares, which are inaccessible to foreigners and quoted in the domestic currency, and B-shares, which can be traded only by foreign investors and are denominated in hard currencies. This dissertation explores the asset pricing patterns for these two classes of shares and the determinants of the price differentials between A-shares and B-shares of same companies. The study is based on the monthly data of 36 selected stocks with both share listings. The asset pricing analysis examines the influence of both international and domestic factors using the Fama/MacBeth two-pass procedure. A Chinese political risk factor, proxied by the idiosyncratic risk in the Hong Kong Hang Seng Index, is studied along with the conventional market and currency factors. The results show that the domestic A-share market is mainly influenced by the domestic market factor while the foreign B-share market is driven by both the domestic and the world market factors and the Chinese political risk factor. The domestic and the world market risks are systematically priced in the B-share market, but none of the selected factors appears to earn an unconditional risk premium in the A-share market. The results support the widely-agreed opinion that the A-share market is driven by irrational speculation while the B-share market is more consistent with fundamentals. Substantial price differentials exist between A-shares and B-shares of same companies. It is found that the required return differentials between A-shares and B-shares largely account for the existence but not the cross-sectional variation in the price differentials. Using trading volume as the liquidity measure and number of analysts tracking companies as the information availability proxy, it is found that the B-share liquidity and the B-share information availability variables are negatively associated with the A-share price premiums. The findings suggest that increasing the number of stocks and the issuing size, and improving the information availability for B-shares would reduce the price differentials and ensure a smooth merge of the two listings in the future.
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