The impact of market imperfections on stock prices : an empirical analysis of AH price premium in China

• Main Authors: Hu, Xinmai, Hu, Yaxi, Xu, Xinyi
• Other Authors: Wu Guiying Laura
• Format: Final Year Project
• Language: English
• Published: Nanyang Technological University 2020
• Subjects: Social sciences::Economic theory
• Online Access: https://hdl.handle.net/10356/138514
• Institution: Nanyang Technological University

With the development of financial market, many Chinese companies have taken the opportunity to go public by listing on various stock exchanges. Besides mainland China, many companies have chosen Hong Kong Stock Exchange to benefit from its international recognition and its tie with mainland China. Contrary to what has been observed in other countries with similar dual-class structures, H shares that are open for off-board investors in Hong Kong trade at a discount relative to A shares that are restricted to domestic investors in mainland China. Such price difference, known as ”Puzzles in the Chinese Stock Market”, exists persistently at both cross-sectional and time-series horizon. We argue that price difference between A shares and H shares could be a result of market imperfections in China. Structural market imperfections, such as asymmetric information, speculative motive, liquidity preference, market sentiment and differential demand, have explanatory power in the existence of AH price premium. We utilize Ordinary Least Squared (OLS) estimation and Generalized Method of Moment (GMM) estimation to study all existing hypotheses thoroughly. Moreover, we argue that capital control in China plays a unique and significant role in interpreting AH price premium. By using panel data, our empirical results reinforce most of existing hypotheses and provide strong quantitative support for proposed hypotheses of capital control. We find, for example, a company with higher oversea revenue ratio tends to have lower AH price premium.