Corporate Governance and Market Segmentation: Evidence from the Price Difference between Chinese A and H Shares Lin Guo* Sawyer School of Management Suffolk University 8 Ashburton Place Boston, MA 02108 Tel: (617) 573-8388 Fax (617) 305-1755 Email:
[email protected] Liang Tang Accounting & Finance Department Harrington Hall Bridgewater State College Bridgewater, MA 02325 Tel: (508) 531-1395 Fax (508) 531-1121 Shiawee X.Yang Northeastern University College of Business Administration Finance & Insurance Group 413 Hayden Hall Boston, MA 02115 (617)373-8209
[email protected] October 2007 Abstract This paper empirically examines the determinants of 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. We find that Chinese firms’ proportion of non-tradable shares, a measure of controlling shareholders' ability to extract private benefits, is an important factor that determines the A-H share price difference. This result is robust after controlling for factors such as differences in required returns, stock demand elasticity, market-portfolio returns, liquidity, asymmetric information, and degree of speculation between domestic and foreign markets. Our findings highlight the importance of corporate governance in explaining the price difference in segmented stock markets. JEL Classification: G15; G34 Keywords: Market segmentation; Corporate governance; Cross-listing; Cost of capital; Liquidity * Corresponding author. We would like to thank James Angel, Jun Cai, Xinghai Fang, Ruyin Hu, Paul Laux, Xiaodong Liu, Wenying Lu, Yihu Shen, Guoxiang Song, Dongwei Su, Qian Sun, Xian Tang, Fenghua Wang, Xiaozu Wang, Jian Xiang, Gang Zeng, and seminar participants at the Shanghai Stock Exchange for constructive comments and suggestions, and Hua Cheng and Yan Pan for valuable research assistance.