Reportgreen2004

Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia

Jianping Mei · Jose Alexandre Scheinkman · Wei A. Xiong

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

China’s stock markets, with stringent short-sales constraints, dominance of inexperienced individual investors, a small asset float and heavy share turnover (500% per year despite a high transaction cost), provide a unique opportunity to study non-fundamental components in stock prices. In particular, several dozen Chinese firms offered two classes of shares: class A, which could only be held by domestic investors, and class B, which could only be traded by foreigners. Despite their identical rights, A-share prices were on average 420% higher than the corresponding B shares. By exploring several different model specifications, we find that the turnover rate of A shares is able to explain a large portion of the cross-sectional variation in A-B share premium. Our further analysis of the relationship between asset float and share turnover shows that trading in A-share markets is more likely to be driven by speculation than by liquidity factors. Our results are robust after controlling for the effects of liquidity, discount rates, and differential risk and demand curves by local and foreign investors.

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References

1978Specification Tests in Econometrics 1973Risk, Return, and Equilibrium: Empirical Tests 2003Liquidity Risk and Expected Stock Returns 1986Asset pricing and the bid-ask spread 2002Market Timing and Capital Structure 2001Investor Psychology and Asset Pricing 2003Overconfidence and Speculative Bubbles 1998Volume, Volatility, Price, and Profit When All Traders Are Above Average

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