B-share discount puzzle in China: a revisit of dual-share firms
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B‑share discount puzzle in China: a revisit of dual‑share firms Donald Lien1 · Chun‑Da Chen2 Received: 1 May 2018 / Accepted: 7 December 2018 © Springer-Verlag GmbH Germany, part of Springer Nature 2018
Abstract This paper revisits the B-shares discount puzzle for dual-class shares in China. The major finding shows that the Shanghai stock market experiences a greater downward correction in stock prices and the discount rate of B-shares diminishes after the B-shares’ opening, but, in the long run the price discounts of B-shares persist. The stock returns of dual-class firms in both Shanghai and Shenzhen B-share markets have negative abnormal returns during the opening event, and then reverse into positive ones markedly in the long run. The investors’ trading activities are sensitive to the number of board members and state-ownership structures. In addition, the return spillover from the sample B-share to the A-share index obviously accelerates and the impact persistence is shortened. Keywords Investment deregulation · Chinese stock market · Dual-share firm · Price discount JEL Classification C22 · G10 · G14 Mahematics Subject Classification 62G08 · 62H12 · 62J02
1 Introduction China’s stock markets have drawn attention from many investors and become the fastest-growing markets since they were re-opened, starting with Shanghai Stock Exchange (SHSE) in December 1990 and Shenzhen Stock Exchange (SZSE) in July 1991. The issue of stock market segmentation has existed within China all along and is a major concern to domestic and foreign investors since February 1992. A listed * Chun‑Da Chen [email protected] 1
Department of Economics, University of Texas at San Antonio, San Antonio, USA
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Department of Economics and Finance, Lamar University, Beaumont, USA
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D. Lien, C.-D. Chen
company in the Chinese stock markets can issue two types of ordinary shares that can be freely traded. Before 2001, domestic investors/individuals in China are only allowed to trade A-shares, while B-shares can only be traded by foreign investors (including the residents of Hong Kong, Macau, and Taiwan) and are denominated in US dollar (Hong Kong dollar) in SHSE (SZSE). As a result, both types of shares have two distinct investor classes and face different preferences for investments.1 In order to meet the needs of a growing financial market, the Chinese government launched several important reforms over the past two decades to liberalize the stock markets.2 One of the most important reforms is the China Securities Regulatory Commission (CSRC) announcement on February 19, 2001 that domestic investors were eligible to invest in B-shares. Intuitively, such a trading policy change should prompt integration between A- and B-share stock markets. However, the trading activity and liquidity of the B-shares remain low, and the price differentials between A- and B-share markets are not alleviated by arbitrage activities. Under the unique features of dual-class shares, there are two interesting topics: the B-share di
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