Abstract
This paper studies the long-standing puzzle of foreign share discount in China and examines how the news perception, which is distorted by media control, influences the discount of foreign B-shares to local A-shares from the same firms. We predict that the government control of Chinese media censors negative news and stresses positive news, in turn leading to the premium on A-shares. Using a readers’ perception-based news classification method, we find that the ratio of positive to negative news is substantially higher for Chinese newspapers than English newspaper. Such favoritism inflates the price of domestic shares and contributes to foreign share discounts. Furthermore, our results suggest that foreign investors react to bad news more negatively than domestic investors do.
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