Information Asymmetry and Asset Prices: Evidence from the China Foreign share discount

Kalok Chan, Albert Menkveld and Zhishu Yang
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Kalok Chan: Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics

No 5, Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics

Abstract: We examine the effect of information asymmetry on equity prices in the local A- and foreign Bshare market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross-sectional variation in B-share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid-ask spread in the A- and B-share markets explains 44% and 46% of the variation in B-share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables. We also examine the behavior of B-share discounts after the B-share market was partially opened up to domestic investors after March 2001. Not only do we observe that B-share discounts decline from an average of 72% to 43%, but we also find that the differences in the adverse selection components across the markets shrink.

Keywords: Information asymmetry; Asset prices; Microstructure; Market segmentation; Spread decomposition; PIN; China (search for similar items in EconPapers)
JEL-codes: G1 G12 G14 G15 (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Journal Article: Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount (2008)
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