Long-run equilibrium, short-term adjustment, and spillover effects across Chinese segmented stock markets and the Hong Kong stock market

This paper adopts a novel FIVECM-BEKK GARCH approach to examine the bilateral relationships among the A-share and B-share stock markets in China and the Hong Kong stock market. The evidence shows that these stock markets are fractionally cointegrated. Analyses of the spillover effects across these markets indicate that the A-share markets are most influential. The relaxation of government restrictions on the purchase of B shares by domestic residents accelerates the market integration process of A-share markets with the B-share and Hong Kong markets. The effects of the Asian crisis on the stock-return dynamic correlations vary across these markets.     

Further evidence on the efficiency of the Chinese stock markets: A note

This paper examines the efficiency of the Chinese A-share and B-share markets following the deregulation of the B-share market which widened ownership to include domestic investors. Applying parametric and non-parametric variance ratio tests to the daily data of 370 shares over 1996–2005, the paper finds that A-shares are more efficient than B-shares, although the efficiency of both markets has improved following the regulatory change. Overall, the results suggest that the Chinese stock markets are characterised by information asymmetry, although the timely access to high quality information that domestic investors enjoy has improved the efficiency of the B-share market.     

The Post-Issue Market Performance of Initial Public Offerings in China's New Stock Markets

In this paper, we investigate the post-issue market performance of initial public offerings (IPOs) in China's new stock markets. Our analysis focuses on whether and how institutional features unique to China differentially affect IPO performance. These features include the existence of dual-class shares for the same underlying firms (A-shares issued to domestic investors and B-shares issued to foreign investors) and the unusually long time lag between the offering and listing dates. Our sample consists of 277 A-share and 65 B-share IPOs that were listed on China's new stock markets during the 1992–1995 period. Our study has a number of interesting results. First, A-share IPOs are much more severely underpriced during the initial return period than B-share IPOs. Second, B-share IPOs underperform A-share IPOs (and the market) during the post-issue periods for up to three years. Third, the results of multivariate regression analyses strongly suggest that economic factors determining the post-issue performance of IPOs differ across the A-share and B-share samples.     

The informativeness of domestic and foreign investors’ stock trades: Evidence from the perfectly segmented Chinese market

This paper uses the perfect market segmentation setting in China's stock market to compare the information content of the stock trades of domestic and foreign investors. We study 76 firms that issue both A-shares (for domestic investors) and B-shares (for foreign investors) and compare the price discovery role of the two segmented markets in China. Before Feb 19, 2001, the A-share market led the B-share market in price discovery, as the signed volume and quote revision of the A-share market had strong predictive ability for B-share quote returns, but not vice versa. After Feb 19, 2001, because some domestic investors were allowed to invest in the B-share market, we find evidence for a reverse causality from the B-share to the A-share market. Nevertheless, the [Hasbrouck (1995). One security, many markets: determining the contributions to price discovery, Journal of Finance 50, 1175–1199.] information share analysis reveals that A-shares continue to dominate the price discovery process.     

Value relevance of accounting information: Evidence from an emerging market

Without making any distinction of the applicable accounting standards, this paper investigates, firstly, the value relevance of accounting information from 1999 to 2012 in different segments of the Chinese stock market. This investigation includes A-shares, prepared under Chinese Accounting Standards (CAS) for domestic firms; B-shares, prepared under either the International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) for both domestic and overseas firms; and H-shares prepared under either the IAS or Hong Kong GAAP for Hong Kong and overseas firms. Then, the paper examines whether or not the converged IFRS with CAS, applicable from 2007 onwards, is more value relevant when compared with prior to the 2007's standards (CAS, IAS, Hong Kong GAAP for A-share, B-share, and H-share markets, respectively). Based on 34,020 firm-year observations and after controlling for industry- and year-fixed effects, the findings suggest that accounting information is value relevant with A- and B-share markets, while it is partially relevant with the H-share market. The paper finds that the converged IFRS with CAS is more value relevant in A-shares and B-shares and it is partially more value relevant with the H-share market. These findings have implications for both policymakers and investors since they provide further empirical evidence for the current policy procedure which harmonizes local GAAP with IFRS.     

Overreaction in the Hong Kong stock market

Overreaction reported in the equity markets of the United States, Spain, and Brazil is also observed in the Hong Kong stock market. The “loser” portfolios of the 33 stocks in the Hang Seng Index (HSI), on average, outperform the “winner” portfolios by 9.9% 1 year after the formation periods. Besides its emphasis on the importance of the Hong Kong market in international investment, this paper is unique in some special features related to the overreaction study. Hong Kong has markets for index futures and stock futures. Only three stocks are used in the portfolios. All the stocks in the HSI have large market capitalization and liquidity and can be shorted with no up-tick rule. Unlike other studies in international stock markets, the “arbitrage” portfolio of buying the loser portfolio and shorting the winner portfolio can actually be formed with minimum cost and easy execution, which makes the overreaction phenomena in this study very powerful.     

Stock Returns and Volatility under Market Segmentation: The Case of Chinese A and B Shares

In most countries where firms list separate shares for trading by foreign and domestic investors, the prices of the foreign shares tend to be higher. In China, the reverse tends to be true. In this paper, we would like to focus on the information content in lagged premiums of Chinese A over B traded shares. The lagged premiums are found to have certain predictive power over the future returns and volatility of both A and B shares, with some interesting patterns. Specifically, an increase in the premium ratio of A shares will be followed by a rise in the return of A shares and a fall in the return of B shares. It is found that both of the investors in Chinese A- and B-share markets reveal positive feedback trading behavior. Moreover, the liquidity and information availability will affect the magnitude of such behavior especially in B-share markets. By using multivariate GARCH model, it is also demonstrated that the unexpected changes in the premium ratio of A-share price over B-share price contribute to the return volatility of both A shares and B shares. These patterns may provide foundations for the development of pricing models for equity shares under market segmentation.     

Determinants and consequences of voluntary switches to Chinese auditors in Hong Kong

Hong Kong market regulators have permitted 12 large Chinese accounting firms to audit the financial statements of Chinese firms that cross list in Hong Kong (i.e., H-share firms) since 2010. This paper examines the characteristics of H-share firms that voluntarily replaced their Hong Kong (HK) auditors with Chinese auditors, and the market reaction to auditor switches following this policy. We find that 38 out of 147 H-share firms voluntarily switched to Chinese auditors during 2011–2013. Switching firms are larger in size and are less likely to use Big4; they also have less need for external financing, a longer cross listing history, and a lower percentage of foreign revenue. We also find that investors negatively react to the auditor switches from HK non-Big4 to China non-Big4, but do not react to the auditor switches from HK Big4 to China Big4. This suggests that investors perceived lower audit quality for China non-Big4.     

Determinants of returns and volatility of Chinese ADRs at NYSE

This paper examines the determinants of returns and of volatility of the Chinese ADRs as listed at NYSE. Using an autoregressive conditional heteroskedasticity (ARCH) model and data from 16 April 1998 through 30 September 2004, we find that Hong Kong stock market (underlying market), US stock market (host market), and local (Shanghai A and B) markets all are important determinants of returns of the Chinese ADRs. However, the underlying Hong Kong market has the most significant impact on mean returns of the ADRs. In terms of the determinants of the conditional volatility of the ADRs returns, only shocks to the underlying markets are significant. These results are consistent with [Kim, M., Szakmary, A.C., Mathur, I., 2000. Price transmission dynamics between ADRs and their underlying foreign securities. Journal of Banking and Finance 24, 1359–1382] who find that the most influential factor in pricing the ADRs in Japan, UK, Sweden, The Netherlands and Australia is their underlying shares. Implications of the results for investors are discussed.     

资本市场开放与股权资本成本——基于沪港通、深港通的实证研究

本文基于沪港通和深港通研究资本市场开放对中国内地股权资本成本的影响。研究发现,受政策风险和市场环境等因素所限,沪港通在初始阶段并未对沪市公司的股权资本成本产生显著影响,但随着政策进一步完善、市场逐渐稳定和交易不断活跃,其对股权资本成本的降低效果于实施两年后开始显现;深港通建立在沪港通的制度基础和运行经验上,其在开通后显著降低了标的公司的股权资本成本。本文还进一步分析了资本市场开放影响股权资本成本的竞争渠道和信息渠道,发现深港通对股权资本成本的降低作用主要集中在投资者竞争程度较高,或是公开信息质量较高、信息不对称程度较低的股票样本。     

CROSS-AUTOCORRELATION BETWEEN A SHARES AND B SHARES IN THE CHINESE STOCK MARKET

Listed companies in China, upon meeting certain requirements, can issue two types of shares: A shares and B shares. Local investors in China can only buy and sell A shares, while foreign investors can only buy and sell B shares. We argue that foreign investors may receive news about China faster than domestic Chinese investors because of information barriers in China. Since foreigners participate in the B-share market, the price movements of B shares should reflect the common information that the foreigners have. Rational A-share investors can therefore condition their trading decisions on the previous price movements of B shares. As a result, returns on B shares should lead the returns on A shares. Using daily prices of A and B shares, we demonstrate that returns of B shares are correlated with those of A shares and that this correlation depends on the information transmission mechanism at work. The pattern of the asymmetric cross-autocorrelation is robust to the inclusion of lagged realized returns and trading volumes.     

Are the China-related stock markets segmented with both world and regional stock markets?

Implementing the Capital Asset Pricing Model framework, this study investigates the integration of three China-related stock markets, namely, the A-, B- and H-share markets, with both the Hong Kong stock market and the world market. An analysis of market segmentation versus integration using the Jorion and Schwartz model suggests that the A-share market was a segmented market during the period 1995–2004. However, evidence of a higher-level integration between the A- and B-share markets, and the A-share and Hong Kong stock markets is found in the sub-period tests. The hypothesis that the B- and H-share markets are becoming increasingly integrated with the world stock market is not supported.     

资本市场开放与股权资本成本——基于沪港通、深港通的实证研究

本文基于沪港通和深港通研究资本市场开放对中国内地股权资本成本的影响。研究发现,受政策风险和市场环境等因素所限,沪港通在初始阶段并未对沪市公司的股权资本成本产生显著影响,但随着政策进一步完善、市场逐渐稳定和交易不断活跃,其对股权资本成本的降低效果于实施两年后开始显现;深港通建立在沪港通的制度基础和运行经验上,其在开通后显著降低了标的公司的股权资本成本。本文还进一步分析了资本市场开放影响股权资本成本的竞争渠道和信息渠道,发现深港通对股权资本成本的降低作用主要集中在投资者竞争程度较高,或是公开信息质量较高、信息不对称程度较低的股票样本。     

Overseas listing as a policy tool: Evidence from China’s H-shares

We investigate why the Chinese government chooses to perform share issue privatization (SIP) of its state-owned enterprises (SOEs) in Hong Kong, despite the benefit of facilitating the domestic stock market development if performing SIP in China (Subrahmanyam and Titman, 1999) and the higher cost to list in Hong Kong. We address this issue by arguing that the positive effect of SIPs on the development of the domestic market may have limitations, especially when the domestic market is not well developed and cannot absorb rapid and large-scale SIP activities. To maintain domestic market order, it may be optimal to carry out SIP in overseas markets. Furthermore, by listing shares in developed overseas markets, SOEs from the less developed countries could leverage on the overseas markets’ better accounting, governance, and legal standards. By examining a sample of 92 Chinese firms listed in Hong Kong and the relevant control samples of purely domestically listed Chinese firms during the period of 1993–2006, we find supporting evidence for both arguments.     

Market segmentation and price differentials between A shares and H shares in the Chinese stock markets

We find that the risk premiums associated with the Hong Kong and mainland Chinese markets in a two-factor model successfully explain the cross section of returns on the A and H shares. Discounts of H-share prices relative to A-share prices are related to the contemporaneous movements of the H-share local market index relative to the A-share local market index, especially during the period of the Asian financial crisis, as well as the spread of savings rates between Hong Kong and mainland China. The evidence suggests that the risk premiums associated with the segmented A-share and H-share markets exert crucial impacts on the price differentials between the two classes of shares.     

Stock price reactions to earnings announcements: evidence from Chinese markets

We examine the stock price reactions to changes in earnings per share (EPS) in the Chinese stock markets. We find that domestic A-share investors do not correctly anticipate the changes in earnings and fail to adjust new earnngs information quickly, but international B-share investors can predict earnings changes better than A-share investors. As a result, abnormal returns (ARs) can be obtained by trading on the earnings information, but for A shares only. An explanation is that most A-share holders are individuals with short-term investment horizon while most B-share holders are large institutions that trade on more detailed and accurate financial information not immediately available to A-share holders.     

Foreign ownership and auditor choice

We take advantage of the unique institutional background of the B-share stock market in China to explore the impact of foreign investors on auditor choice. Our results show that the percentage of B-share firms audited by Big 4 auditors has decreased with both economic and statistical significance since the segmented B-share market was opened to domestic investors in 2001. We find that the negative effect of opening the B-share market on demand for high audit quality is more pronounced for firms with greater decreases in foreign ownership and for firms with strong incentives to be opaque, such as those in a weak institutional environment, firms with more “other receivables,” firms with more related-party transactions, and firms with political connections. Additional analysis shows that our results are not driven by the concurrent decline in capital-raising activities in the B-share market.     

The Response of Dynamic Herd Behavior to Domestic and U.S. Market Factors: Evidence from the Greater China Stock Markets

ABSTRACT

We investigate the dynamic reaction of stock market herding in China, Hong Kong, and Taiwan to unexpected shocks from domestic and U.S. market factors. In China and Taiwan, herding is more pronounced, and the investors tend to herd with the rising stock market returns. Overconfident investors will herd on the subsequent trading days under market stress. Compared with the response to the domestic market factors, the responses of herding in the Greater China stock market to the U.S. market factors are weaker. After the 2007–8 financial crisis, the U.S. market factors highly explain the forecast error variance of herding in the Shanghai A-share and Taiwan markets.     

Changing conditions in the Hong Kong new issues market

This paper examines the Hong Kong IPO market from August 1995 to July 1999 and finds that the time of the June 30 1997 political handover coincides with the transition in the IPO market from ‘hot’ to ‘cold’. Although the handover was an anticipated event, an explanation for the change in market is that the political handover created uncertainty among investors; a type of information asymmetry where all investors faced greater uncertainty. Our finding provides empirical support to literature which proposes that events in the months preceding the October 27 1997 correction in Asian stock markets facilitated a decline in confidence in financial markets, subsequently characterised as the ‘Asia Financial Crisis’. In addition, we find initial returns of newly listed stocks in the Hong Kong market are associated with market condition but not associated with any particular industry (i.e., PROPERTY) or geographic location (i.e., ‘H’ SHARES) suggesting that the prevailing market condition was spread more generally across issues.     

Corporate governance and market segmentation: evidence from the price difference between Chinese A and H shares

This paper empirically examines whether the price difference between Chinese A shares, which are traded in the domestic market, and their matching H shares, which are traded in the Hong Kong market, can be explained by firms’ corporate governance characteristics. We find that the A- to H-share price premiums are higher for firms in which the controlling shareholders and corporate insiders have greater potential to expropriate wealth from outside investors. This result is robust when we use a variety of corporate governance variables specific to listed Chinese companies to explain the A-share price premiums and when we control for differences between domestic and foreign investors in required returns, degree of speculative trading, liquidity, information, and demand elasticity. Our findings highlight the important role of corporate governance in explaining the price difference in segmented stock markets.