A corporate governance explanation of the A-B share discount in China

B-shares listed in China are traded at substantial discounts to their corresponding A-shares although they have identical rights. We offer a governance explanation and suggest that relative to domestic investors, foreign investors care more about a firm’s governance quality. Results are supportive, as the B-share price discount is higher for firms that have weaker governance characterized by 1) higher ownership concentration, 2) ineffective boards with a higher proportion of directors appointed by the parent company, 3) lower dividend payouts, and 4) higher levels of information asymmetry.