B-share Market Research Articles

Cross-listing and bonding premium: Evidence from Chinese listed companies

This paper examines whether cross-listing enables firms to earn a higher valuation. We contrast a sample of 580 Chinese firms cross-listed on the B-share market of China and 159 Chinese firms cross-listed on the Hong Kong H-share market against a control sample of domestic firms listed only on the A-share market of China. It is found that firms cross-listed on B-share and H-share markets both enjoy bonding premiums. Moreover, the bonding premium is larger for H-share firms than for B-share firms. Results show that the amount of bonding premium is positively related to the level of investor protection, which provides supporting evidence to the bonding theory.

Why Investors do not Buy Cheaper Securities? An Analysis of Trading by Individual Investors in Chinese Stock Market

We examine trading behavior of Chinese domestic investors after they are given access to the B-share market from 2001. We observe that even though A-shares trade at a premium to B-shares, domestic investors are reluctant to switch. The portfolio inertia can be explained by market-specific experience. Investors are less likely to buy B-shares if they have more experience in the A-share market, and vice-versa. The market-specific experience constrains the extent that investors respond to A/B share premium and liquidity, and has an adverse effect on their trading performance. Our study suggests that overweighting of personal experience can cause portfolio inertia.

Information Asymmetry, Price Discovery, and the Chinese B-Share Discount Puzzle

This paper addresses the information asymmetry between Chinese local A-share and foreign B-share markets and its impact on the B-share discount puzzle, contingent upon Chinese stock market liberalization reforms in 2001 and 2002. In contrast with the widespread notion that domestic investors are better informed than foreign investors, this study shows that foreign investors actually possess more value-relevant, firm-specific information in emerging markets, where information transparency and investor protection rights are relatively weak. As such, the observed B-share discount is not compensation for the informational disadvantage of foreign investors but, rather, the result of a downward price correction (toward the fundamental values) once more firm-specific information is capitalized by sophisticated foreign investors in the B-share market. The price correction effect is significant even after controlling for several alternative explanations. Further investigation suggests a mitigated degree of information asymmetry and B-share discount upon market liberalization.

Panel cointegration of Chinese A and B shares

We study information flows in China's stock markets. By using panel data methods we test for a unit root in the price premium of domestic investors’ A shares over foreign investors’ B shares, as well as cointegration between the A- and B-share prices on the Shanghai and Shenzhen stock exchanges. We find that the A-share premia are nonstationary, and that the A- and B-share prices are not cointegrated up till January 2001. After February 2001, when domestic investors were allowed to trade B shares, the A-share premia become stationary and the A- and B-share prices cointegrated. One interesting result from the panel data analysis is that most firms’ A and B shares are cointegrated, but not all firms. Cointegration is more likely for firms with a small A-share premium, low ratio of nontradeable shares, high growth rate and large B-share market capitalization relative to the A-share market capitalization. Our findings suggest that the relaxation of the investment restrictions decreased the segmentation between the A- and B-share markets in China.

Weather effects on the returns and volatility of the Shanghai stock market

This study investigates the weather effects on returns as well as volatility in the Shanghai stock market. In order to analyze the influence of the opening of B-share market to domestic investors, it is assumed that domestic investors are more sensitive to the Shanghai local weather than foreign investors. In doing so, extreme weather condition dummies are generated by using the 21-day and 31-day moving average and its standard deviation. Empirical analysis provides two key results regarding weather effects. First, the weather effect exists in the A-share returns, but does not exist in the B-share returns over the whole period. In addition, the post-opening period shows the strong weather effect on B-share returns only, indicating that the market openness to domestic investors results in the weather effect. Second, the weather effect has a strong influence on the volatility of both A- and B-share returns. Similar to the case of returns, the weather effect on volatility is explained by the openness of B-share market.

ARE NONLINEAR TRADING RULES PROFITABLE IN THE CHINESE STOCK MARKET?

The rise of China in the world economy has attracted a great deal of international attention. This paper investigates the performance of nonlinear self-exciting threshold autoregressive (SETAR) model-based trading rules in the Chinese stock market. We compare the performance of the SETAR model with the autoregressive (AR) model and the moving average (MA) trading rules. Our results indicate that trading rules are profitable in the B-share market, and that the nonlinear SETAR rule outperforms the other two linear rules in general.

Speculative trading and stock returns: A stochastic dominance analysis of the Chinese A-share market

The pricing of A-shares in China has long puzzled financial economists. This paper applies recent tests of stochastic dominance (SD) to examine whether differences in the return distributions of A- and B-shares in China are consistent with market efficiency. As SD is nonparametric, market efficiency can be examined without the joint test problem arising from misspecifications in the asset pricing benchmark. Our results show A-shares have second-order dominated B-shares from 1996 to 2005. This dominance was most significant during the market segmentation period, but has continued, albeit to a lesser extent even after the B-share market was opened to local investors in 2001. Our results are robust to using residual returns from an international asset pricing model instead of raw returns. We conclude that the superior performance of A-shares cannot be attributed to risk. The results are more likely due to a return bias caused by intense speculation among retail individuals under limited arbitrage.

Stock Return Seasonalities and Investor Structure: Evidence From China's B-Share Market

This paper investigates whether seasonalities in daily stock returns are related to the trading behavior of individual and institutional investors. The change in the investor structure of B-share markets in Shanghai and Shenzhen after the abolition of ownership restrictions in 2001 provides a unique testing environment. We show that day-of-the-week eff ects are attenuated after the market entrance of Chinese individual investors who had previously not been allowed to trade in B-shares. Our empirical results suggest that institutional rather than individual investors are a main driving force behind such anomalies. In addition, we hand evidence of reduced index return auto-correlation and US spillover effects in the post-liberalization period.

Market liberalization within a country

China's B-share market, which used to be restricted to foreign investors, was partially opened up in February 2001 to Chinese local investors. We take this as a controlled experiment in cross-border trading on a small scale. We find mild but positive effects on the B-share market, with higher volumes, lower levels of volatility, lower bid–ask spreads and more liquidity after liberalization. Between A- and B-shares, price disparities narrowed; the correlation and the co-integration relationships became stronger; and the flow of information became more balanced. More new individual investors entered into the B-share market without crowding out existing institutional investors. Even though the liberalization measure is partial and one-way, it has helped to improve the quality of the B-share market, and our results lend no support to the popular claim that liberalization does nothing but help the existing foreign shareholders to cash out.

Further evidence on the efficiency of the Chinese stock markets: A note

This paper examines the efficiency of the Chinese A-share and B-share markets following the deregulation of the B-share market which widened ownership to include domestic investors. Applying parametric and non-parametric variance ratio tests to the daily data of 370 shares over 1996–2005, the paper finds that A-shares are more efficient than B-shares, although the efficiency of both markets has improved following the regulatory change. Overall, the results suggest that the Chinese stock markets are characterised by information asymmetry, although the timely access to high quality information that domestic investors enjoy has improved the efficiency of the B-share market.

Empirical analysis of dynamic correlations of stock returns: evidence from Chinese A-share and B-share markets

This paper examines the dynamic correlation structure between A-share and B-share stock returns based on three different measures of correlation coefficients. Testing the models by employing daily stock-return data for the period from 1996 through 2003, we reach the following empirical conclusions. First, the correlation coefficients between A-share and B-share stock returns are time varying. Second, the dynamic path of the correlation coefficients indicates that the correlation coefficients are significantly correlated with the trend factor. Third, there is a substantial spillover effect from the Asian crisis to Chinese stock-return dynamic correlations. Fourth, the evidence suggests that the time-varying correlations are significantly associated with excessive trading activity as measured by excessive trading volumes and high–low price differentials. Fifth, the correlation between A-share and B-share markets has increased since the relaxation of the restriction on B-share market investments by domestic investors.

Integrating A- and B-Share Markets in China: The Effects of Regulatory Policy Changes on Market Efficiency

We investigate the effectiveness of two recent regulatory policy changes on market efficiency in the Chinese A- and B-share markets. Overall, the opening of the B-share market to domestic Chinese investors and the limited opening of the A-share market to foreign investors increase market efficiency. The opening of the B-share market significantly reduces the price differential between A- and B-shares. Furthermore, there is no longer feedback in returns between the two markets in recent years. Our results provide evidence that there is no detrimental effect to market efficiency by integrating Chinese investors to international markets and foreign investors to the Chinese stock markets.

The informativeness of domestic and foreign investors’ stock trades: Evidence from the perfectly segmented Chinese market

This paper uses the perfect market segmentation setting in China's stock market to compare the information content of the stock trades of domestic and foreign investors. We study 76 firms that issue both A-shares (for domestic investors) and B-shares (for foreign investors) and compare the price discovery role of the two segmented markets in China. Before Feb 19, 2001, the A-share market led the B-share market in price discovery, as the signed volume and quote revision of the A-share market had strong predictive ability for B-share quote returns, but not vice versa. After Feb 19, 2001, because some domestic investors were allowed to invest in the B-share market, we find evidence for a reverse causality from the B-share to the A-share market. Nevertheless, the [Hasbrouck (1995). One security, many markets: determining the contributions to price discovery, Journal of Finance 50, 1175–1199.] information share analysis reveals that A-shares continue to dominate the price discovery process.

China's B-Share Discount Puzzle: New Event, New Hypothesis and New Findings

There exists market segmentation in China's stock markets, in which local firms issued two classes of shares: class A shares available only to Chinese citizens and class B shares available only to foreign citizens. Contrary to what has been observed in other markets with a similar segmented structure, China B shares trade at a discount relative to A shares. After the Chinese Securities Regulatory Commissions opened the B-share market to Chinese citizens on February 19, 2001, the prevailing and persistent B-share discount dropped to 25 percent from its previous on average 75 percent. We exploit this new event and test the explanatory powers of different hypotheses on China's B-share discount puzzle. Our results support the differential risk hypothesis and liquidity hypothesis. We also document the effect of exchange risk factor on B-share discount through time.

Herding behavior in Chinese stock markets: An examination of A and B shares

This study examines herding behavior in dual-listed Chinese A-share and B-share stocks. We find evidence of herding within both the Shanghai and Shenzhen A-share markets that are dominated by domestic individual investors, and also within both B-share markets, in which foreign institutional investors are the main participants. Herding occurs in both rising and falling market conditions. Herding behavior by A-share investors in the Shanghai market is more pronounced under conditions of rising markets, high trading volume, and high volatility, while no asymmetry is apparent in the B-share market.

Bonding Premium as a General Phenomenon

We suggest that Doidge et al.'s (2004) finding of non-U.S. firms worth more when listed in the U.S. is a special case of a general phenomenon. When firm bonds to a market by listing there, it tends to enjoy the premium. As to where the quality market is physically located, it is not critical. We provide strong supporting evidence from examining Chinese firms cross-listed in various markets. We contrast a sample of 111 Chinese firms listed on the higher quality China B-share market and 53 Chinese firms listed on the even higher quality Hong Kong H-share market against a control sample of domestic firms listed only on the low-quality China A-share market. We recorded general existence of cross-listing premiums of the B-share and H-share firms' stocks traded on the A-share market. More importantly, the cross-listing premium is larger for H-share firms than for B-share firms. As Chinese stocks trade at a price discount in the B-share and H-share markets, observing the cross-listing premium in the A-share market should be viewed as particularly supportive to the bonding hypothesis since other confounding effects, such as the diversification effect, simply do not exist in such a price-discount market situation.

Cross-Autocorrelation of Dual-Listed Stock Portfolio Returns

In this paper, we apply a GARCH model to examine the cross-autocorrelation pattern between daily returns of portfolios composed of dual-listed stocks in Chinese stock market, before and after China opened its once foreign-exclusive B-share market. A lead-lag relationship between the A-share and B-share portfolio returns is identified during our sample periods, with the A-share portfolio leading the B-share portfolio. Upon the opening of B-share market, a change from underreaction to overreaction is found in the response pattern of B-share market, producing a rarely seen negative cross-autocorrelation. The results of two additional tests are reported. First, by decomposing the portfolio return into portfolio-specific and market-wide returns, we find that the market-wide information contained in A-share portfolio return is strongly associated with the cross-autocorrelation structure. Second, we document a directional asymmetry in which B-share portfolio shows either slow or over response to bad, but not good, news of A-share portfolio. We conclude that information asymmetry alone is not enough to explain the lead-lag relationship, and investor behavior must be taken into consideration.

Further Evidence on the Efficiency of the Chinese Stock Markets

This paper examines the relative efficiency of the Chinese A- and B-share markets following the deregulation of the B-share market which widened ownership to include domestic investors. Applying both parametric and non-parametric variance ratio tests to the daily data of 304 A-shares and 66 B-shares over the period 1 January 1996 to 30 April 2005, the paper finds that A-shares are characterised by a greater level of efficiency than are B-shares, although the efficiency of both markets has improved following the regulatory change. Overall, the results suggest that the Chinese stock markets are characterised by information asymmetry, although the timely access to high quality information that domestic investors in the A-share market enjoy, has improved the efficiency with which information is incorporated into the prices of B-shares.

The Impact of Increased Accounting Disclosure on Information Asymmetry: A Case of Implementing New Auditing Standards in Emerging Markets

In this paper, I investigate the association between increased accounting disclosures and bid-ask spreads in an emerging market (China). I hypothesize that the implementation of new auditing standards in emerging markets would result in increased disclosures and a subsequent reduction in information asymmetry. I report the following primary findings. First, I find that adverse selection component accounts for about 37% of the total relative spread, indicating that information asymmetry cost is substantial in the emerging market. Second, after controlling for various firm characteristics and other market liquidity variables, I find in the cross-sectional analysis that Chinese companies experienced significant reduction in bid-ask spread subsequent to their adoption of new auditing standards. The sensitivity test shows that these results remain significant for the first set of auditing when the simultaneous effects of disclosure on trading volume and price volatility is considered. Third, after controlling for the concurrent effects of trading volume and price volatility, time-series intervention analyses show that the reductions in bid-ask spreads were significant and permanent. A sensitivity test of dummy events introduced on the first trading date of the fourth quarter of each year yields substantially different results, indicating that the significant downward interventions in bid-ask spreads are not driven by any systematic changes in the market microstructure. In addition, I find that the B-share market, where international auditing standards had been applied, experienced significantly less changes in the bid-ask spreads than A-share market. The results have implications for the standard-setters and regulators in emerging markets.

Value relevance of international accounting standards harmonization: Evidence from A- and B-share markets in China

Applying both the price-levels model and the lagged-price-deflated returns model, we investigated the incremental value relevance of the reconciliation of accounts from the Chinese Accounting Standards (CAS) to the International Accounting Standards (IAS) by those Chinese listed companies that have simultaneously issued A-shares and B-shares. In addition, we examined the usefulness of accounting numbers (earnings and book values) and their value relevance to the A- and B-share markets in China. The study finds that earnings and book values of owners’ equity determined under CAS are more relevant accounting information for the purpose of determining the prices of A- and B-shares. The CAS-based earnings changes were reflected in stock returns in the B-share market, while the CAS-based earnings were closely associated with stock returns in the A-share market. However, the study found that the reconciliation of earnings and book values from CAS to IAS basis is partially value-relevant, mainly to stock prices in the B-share market, while the earnings reconciliation is generally not value-added to stock returns in either the A- or the B-share market. The study results suggest that accounting numbers based on domestic accounting standards, in contrast to IAS, are more value-relevant in the Chinese stock market at present.