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Discounts On Illiquid Stocks: Evidence From China

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  • Zhiwu Chen
  • Peng Xiong

Abstract

This paper provides evidence on the significant impact of illiquidity or non-marketability on security valuation. A typical listed company in China has several types of share outstanding: (i) common shares that are only tradable on stock exchanges, (ii) restricted institutional shares (RIS) that are not tradable and can only be tansferred privately or through irregularly scheduled auctions, and (iii) state shares that are only transferable privately. These types of share are indentical in every aspect, except that market regulations make state and RIS shares almost totally illiquid. Our analysis focuses on the price differences between RIS and common shares of the same company, using both auction and private-transfer transactions for RIS shares. Among our findings, the average discount for RIS shares relative to their floating counterpart is 77.93% and 85.59%, respectively based on auction and private transfers. The price for illiquidity is thus high, significantly raising the cost of equity capital. This illiquidity discount increases with both the floating shares' volatility and the firm's debt/ equity ratio, but decreases with firm size, return on equity, and book/price and ear

Suggested Citation

  • Zhiwu Chen & Peng Xiong, 2001. "Discounts On Illiquid Stocks: Evidence From China," Yale School of Management Working Papers ysm232, Yale School of Management, revised 01 Sep 2002.
    • Handle: RePEc:ysm:somwrk:ysm232
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    File URL: http://icfpub.som.yale.edu/publications/2480
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    Cited by:

    1. Los, Cornelis A. & Yu, Bing, 2008. "Persistence characteristics of the Chinese stock markets," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 64-82.
    2. Chen, Fengqin & Huyghebaert, Nancy & Lin, Sen & Wang, Lihong, 2019. "Do multiple large shareholders reduce agency problems in state-controlled listed firms? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    3. Laurence Copeland & Biqiong Zhang, 2003. "Volatility and Volume in Chinese Stock Markets," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 1(3), pages 287-300.
    4. Jianping Mei & Jose A. Scheinkman & Wei Xiong, 2009. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 225-255, November.
    5. Yang, Zhenyi & Yu, Yiwei & Zhang, Yubing & Zhou, Sili, 2019. "Policy uncertainty exposure and market value: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    6. Chunxin Jia & Yaping Wang & Wei Xiong, 2015. "Social Trust and Differential Reactions of Local and Foreign Investors to Public News," NBER Working Papers 21075, National Bureau of Economic Research, Inc.
    7. Chen, Kevin C.W. & Wang, Jiwei, 2007. "Accounting-based regulation in emerging markets: The case of China's seasoned-equity offerings," The International Journal of Accounting, Elsevier, vol. 42(3), pages 221-236.
    8. Jianping Mei & Jose Scheinkman & Wei Xiong, 2005. "Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia," Levine's Bibliography 122247000000000867, UCLA Department of Economics.

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