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

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

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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.

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Publisher Info
Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0005.

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Date of creation: 2006
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Handle: RePEc:dgr:vuarem:2006-5

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Related research
Keywords: Information asymmetry; Asset prices; Microstructure; Market segmentation; Spread decomposition; PIN; China;

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Find related papers by JEL classification:
G1 - Financial Economics - - General Financial Markets
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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