Decomposing the Bid-Ask Spread in a Segmented Equity Market: Analyzing Chinese A Shares Versus B Shares

Because of a regulatory policy change in February 2001, the segmentation of the Chinese stock market significantly decreased. Using this event, we show that the Chinese A-share market is more informationally efficient than the B-share market, both before and after the opening of the B-share market. Furthermore, after the event, both the adverse selection and the order-processing component of B shares decreased, as a result of a larger investor base and possibly a lower proportion of informed investors. This study thus sheds new light on the market segmentation and its effect on transaction costs.