Research On The A Shares And H Shares Price Difference For Cross Listed Companies

In China, market segmentation is a very special case where foreign shares (H shares) suffer significant price discount than domestic shares (A shares), which is on the contrary to the cases in most other countries and is called a puzzle by some scholars. However, this puzzle seems to return to normal in the recent years. Aiming at explaining this special phenomenon and giving prediction on its trend, this paper studies A shares and H shares price difference for companies which cross-list on China mainland market and Hong Kong market.This paper includes both theoretical analysis and empirical study on the issue. In the theoretical part, combined with the previous researches on market segmentation hypothesis and the studies on related issues, together with the analysis of the specific situation in China, we conclude that information asymmetric, liquidity difference, demand elasticity difference, exchange risk, behavior finance, domestic policies are the possible main factors causing the price difference. In the empirical part, paper applies OLS methods and Fama Macbeth approach on the study of each factor we list in the theoretical analysis. Both weekly data and monthly data from January 2003 through December 2010 are used in the test. In the results, exchange rate, information asymmetric and behavior finance factors pass the significant test and are consistent with the theoretical research hypotheses.Related policy recommendations are given in the end. In order to eliminate the price difference and improve market efficiency, we need to foster institutional investors and mature investment philosophy, strengthen and standardize information disclosure, and further open domestic capital market.