The Market Segmentation And Stock Prices In China's Stock Market

Based on the theoretic analysis of the asset-pricing model in segmented capital markets, and the empirical research on the China's A-share, B-share and H-share market from Jan. 1994 to Dec. 2000, this paper is to investigate and depict the effect of market segmentation on stock prices in China's stock market.The capital controls in segmented markets cannot match the assumption of the traditional asset pricing theory, leading to different prices of different shares with the same rights. All existing theoretical literatures and empirical studies find that unrestricted shares trade at premium prices compared to restricted shares. The arguments and factors in explaining the phenomenon include the equilibrium pricing, investment barriers, differential demand and so on. In China's stock market, a local firm issues two classes of shares: A shares are open only to local investors and B shares (H shares) are open only to foreign investors. In contrast to what has been observed in other markets with a similar segmented structure, the China B shares and H shares trade at an average discount of about 75% relative to the prices at which domestic A shares trade. There are only limited studies on this "strange" phenomenon.The 4th Chapter of this paper focuses on the asset-pricing models in China's segmented markets. Based on Grossman and Stiglitz(1980), we develop a simple model, incorporating both information asymmetry and market segmentation, and derive a relative pricing equation for A shares and B shares. Our theoretical model supports the various arguments and factors. The 5th Chapter of this paper focuses on the empirical study on China's A-share, B-share and H-share market from Jan. 1994 to Dec. 2000. We find that the phenomenon can be explained by basic economic principles and the proxies for information asymmetry account for a significant portion of the B share and H share discounts. Prior to 1998, the information asymmetry focuses on the disclosure quality and transmission efficiency; after 1998, the effect focuses on the different reflection to the same information among different investor groups. In addition, the greater difference of demand elasticity between domestic investors and foreign investors make large contribution to deepen B share and H share discount degree in recent years. The relative illiquidity and higher expected return to compensate the higher risk in B-share and H-share markets are also significant. Our specification can explain 90% of the time serial and cross sectional variance of the B share and H share discounts. This 6th Chapter of this paper empirically examines the impact of the listing of corresponding B shares on the price of A shares. Using standard event methodology to examine the daily abnormal returns around the prospectus date and the listing date of B shares shows that the dual listing has a negative effect on returns. These negative abnormal returns can be explained by the market segmentation hypothesis and the investor recognition theory of Merton, but not consistent with the liquidity theory of Amihud and Mendelson. The dual-listing performance implies that the purpose of management is not to increase the wealth of shareholders, but other non-economic considerations.