Information Asymmetry, Cultural Difference, and Divergence in Investor Reactions : Empirical Evidence from the Chinese and U.S. Stock Markets

This paper investigates how heterogeneous sentiments and perspectives expressed in public online media about the abolition of the Chinese presidential term limit in 2018 may have caused a divergence in investor behavior between the U.S. and China. We document that sentiments expressed in social media in reaction to the political event differed vastly between the two countries. In comparison with Chinese investors, the sentiment among U.S. investors appears to have been considerably more pessimistic. Accordingly, we find that after the event, Chinese companies listed in the U.S. significantly underperformed relative to a sample of propensity score matched (PSM) Chinese firms listed on the Shanghai/Shenzhen stock exchanges. In additional analyses, we find that the stock price reactions of firms listed in the U.S. were strongly influenced by the firms’ political connectedness to governing bodies in China. Our findings suggest that investors’ interpretations appear to follow the hegemonic political culture of their home country