Voluntary Disclosure and Asset Pricing: Evidence from Chinese Dual-class Firms

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The empirical link between disclosure practices and asset pricing is difficult to establish because cost of capital is difficult to measure directly and because disclosure practices are endogenous to firm economics and governance. In this paper, I employ a setting in which certain Chinese companies have two classes of shares - A and B shares - that are available to mutually exclusive sets of investors: domestic and foreign investors. Chinese dual-class firms offer several advantages in examining the impact of disclosure practices on asset pricing. First, from a measurement perspective, because A and B shares depend on the same expected stream of future cash flows, the price differential between A and B shares reflects the differential cost of capital from domestic and foreign investors. Therefore, no explicit measure of cost of capital is needed. Second, from a research design perspective, as the policy change that allowed domestic investors to trade in B shares is an exogenous shock, the before-and-after design helps address the potential endogenous nature of voluntary disclosure practices. I find that, holding other factors constant, firms with more forthcoming disclosure practices have smaller price differentials between A and B shares. In economic terms, the price differential drops by 178 basis points if a firm improves its disclosure by one standard deviation.