A (partial) resolution of the Chinese discount puzzle

G. Karolyi (), Lianfa Li and Rose Liao

Journal of Financial Economic Policy, 2009, vol. 1, issue 1, 80-106

Abstract: Purpose - The purpose of this paper is to examine the changes inB‐share discounts across 76 Chinese stocks around an important regulatory event to understand the importance of political risk in pricing stocks in emerging markets. Design/methodology/approach - On February 19, 2001, the Chinese Securities Regulatory Commission announced that Chinese residents would be allowed to ownB‐share classes of stocks traded on both the Shanghai and Shenzhen stock markets. These share classes were previously restricted to foreign investors while domestic residents were only permitted to holdA‐share classes of stock and were typically priced at a significant discount. This regulatory change triggered a dramatic decline of prevailingB‐share discounts from 80 percent down to 40 percent. Findings - The paper finds that the largest declines in theB‐share discounts around this regulatory event are concentrated in the firms with low government ownership stakes and are unrelated to the firms' risks, relative supplies of shares outstanding and liquidity attributes. Research limitations/implications - This surprising finding challenges the current wisdom about what influences theB‐share discount and particularly the role of political risk in explaining the discount puzzle. Originality/value - The paper offers an alternative interpretation for theB‐share discount puzzle. The findings have important implications for China's future financial liberalization policies.

Keywords: China; Political risk; Market segmentation; Stocks (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:v:1:y:2009:i:1:p:80-106

DOI: 10.1108/17576380910962394

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