| As the representation of emerging stock market, China stock market has many characteristics which are different from developed stock markets. The individual investors are the main body of the investors in China stock market. They have limit channels to get information and their information costs are higher. Therefore, the average degree of incomplete information of investors in China market is higher than that of developed market, so that the incomplete information is important to the emerging market.Investor recognition is a concept to represent for incomplete information, which is raised by Merton in 1987. Merton(1987) realizes the limitation of traditional CAPM and raises the investor recognition hypothesis. He assumes investors only know a subset of all stocks in the market. Based on this hypothesis, Merton(1987) gets a simple model of capital market equilibrium with incomplete information. The equilibrium means that firm values are increasing in investor recognitions. The effect has nothing to do with the game surrounding trading between informed and uninformed investors in an asymmetric information environment. Merton believes that only equally-informed investors trade in one stock. He focuses on the differences in the breadth but not the depth of investor cognizance. While in an asymmetric information environment, informed investors will attempt to arbitrage by using their information, in so doing, information can be transmitted across investors. This course affects the speed of information diffusion. Therefore information asymmetries affect not only investors’ firm values, but also the relationships between investor recognitions and firm values. In a market tier, whether the investor recognition hypothesis holds or not in an environment with asymmetric information should be tested firstly. Secondly, in a firm tier, the moderator function of information asymmetries on investor recognition effects should be tested.The market tier, I test Merton’s(1987) investor recognition hypothesis by means of an event study. The event is the Split Share Structure Reform which happens only in China. I distinguish investor recognition effect from an effect of market segamentation based on institution by its’ long term nature through a difference-in-difference method. The test affirms the important meaning of investor recognition in Chinese Market and provides theory basis for investor protection. At the same time, I find that institutional investor recognition effect is different from the status of the market; it is not a mechanism of incomplete information but a mechanism of information asymmetry.The firm tier, the moderator function of information asymmetry on investor recognition effect is another important issue in this paper. I choose three proxy variables for information asymmetry. The variables include trading volume controlled error-in-variable, insider holdings and forecast dispersion. I prove that information asymmetries have negative functions on recognition effects of market investors, while have positive impactions on recognition effects of institutional investors. These results suggest that there is market segmentation in China A-shares market. I verify that information asymmetries can make investor recognition effect turn to reverse under some conditions, such as insiders have enough power to guarantee their employment, while their aims do not comply with shareholders’ absolutely, or the forecast dispersions are small. So the mechanism of the negative relationship between investor recognitions and firm values induced by the moderating effect of information asymmetry on recognition effect is different from the mechanism of Miller’s(1997) heterogeneous beliefs hypothesis. These findings mean that reducing unreasonable information asymmetry, provide fair opportunities, not only have benefits for attracting investors focus, but also have important meaning for the continuous healthy development of the market. |
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