Chinese Cross-listing A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy (Economics and Finance) Lixian LIU School of Economics, Finance and Marketing College of Business RMIT University February 2011 Declaration I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the thesis is the result of work which has been carried out since the official commencement date of the approved research program; any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics procedures and guidelines have been followed. _______________________________________ LIU, Li Xian 22 February, 2011 ii Acknowledgements The journey of this PhD thesis was fascinating, and the completed thesis would not have been possible without significant advice, stimulation and efforts from the people around me. Foremost, I am indebted to my senior supervisor Professor Tony Naughton for his stimulation of the research ideas, for his kind forgiveness of my mistakes, for his patience in reading the drafts, and for his support to the research conferences. Discussion with other members of my supervisory panel has enriched this work. My special thanks go to Dr. Vikash Ramiah, for his generous advice, insightful comments, and guidance to the completion of this thesis. My deep appreciation also goes to Dr. Sivagowry (Gowrie) Sriananthakumar for serving on my supervisory panel, especially for her invaluable assistance and generous supports in solving technical issues during the data analysis stage. Discussion with other academics from RMIT University has enriched this work as well. My special thanks go to Professor Tim Fry, Professor Heather Mitchell, Dr. Alberto Posso, Dr. Silvia Zia Islam, for their time and constructive advice on model refinement, statistical matters on the data analyses for the research. Financially, this research has been made possible with the Australia Postgraduate Award scholarship provided by the RMIT University. I also desire to express my heartfelt obligation to my husband, Professor, Dr. JIANG Fuming, for his continuous support to explore my potential by going on a journey of PhD study. He has also been my mentor in both my study and my life. Our seven-year-old lovely son, Jiang Huiyuan, also well known as Xinxin, has witnessed this journey. Xinxin has been one of the most inspirational members around me for accomplishing this journey. Lastly, I would like to thank Dr. Lisa Lines for providing me with her professional editing services, to ensure the completeness and consistency of the thesis. iii Abstract Since the re-establishment of the stock market in China in 1990, cross-listing 1 by Chinese companies has been growing constantly, and has become a complementary source of foreign capital inflows into the Chinese economy via international stock markets in addition to the inward foreign direct investment started in 1980. By the end of 2008, there were over 800 Chinese securities listed and traded in several major stock exchanges around the world, which have raised total capital amounting to over US$112 billion according to the China Securities Regulatory Commission (CSRC) Report (2008). The experience of Chinese companies’ cross-listing in the international stock exchanges has, to some extent, provided an example of company-initiated bonding practices among the various bonding mechanisms such as diversifying shareholder base, opting into higher financial disclosure, and improving corporate governance. With the increasing presence of Chinese companies listed and traded in the international stock markets, research on Chinese cross-listing is emerging as a new focus for academic research in the field. A number of studies have investigated the price disparity and price discovery between dual-listed Chinese securities (focus on Hong Kong and New York dual-listings); yet little is known about how bonding effects Chinese firms cross-listed in international stock markets, the price and market linkage among those dual- and triple-listed shares, and whether investment strategies could be developed from the price disparity phenomenon between dual-listed shares. Building upon the existing literature on cross-listing, and using the data of listed Chinese companies during the period of 1993–2008, this study examines the relevance of the theories of the bonding hypothesis, cointegration and the law of one price in the context of Chinese firms’ cross-listing in the international capital markets. The results suggest that Chinese cross-listings exhibit a bonding premium only in the United States (US) markets, while the non-cross-listed Chinese firms demonstrate better firm performance than those listed in London, Singapore and Hong Kong. Further, the results reveal that for all the listed Chinese firms, profitability rate and the leverage ratio play a 1 In this study, the terms cross-listing, overseas-listing, international-listing, dual-listing, and triple-listing are used interchangeably to eliminate any possible conflict of semantics. All these terms have the same meaning when a security is registered for trading on more than one exchange. Dual-listing or triple-listing means a Chinese security is listed and traded on two or more exchanges. iv positive role in improving the firms’ performance. The adoptions of international accounting standards as a must-to-do corporate governance mechanism regulated by the host stock exchanges has less effects on Chinese firms’ performance, but the adoption of Big Four auditing firms does. And the interaction between cross-listing with different corporate governance mechanisms have different effects on firms’ valuation. The study suggests that merely borrowing a corporate governance mechanism does not guarantee the improvement of the firm performance. Instead of using market indices, this study examines the short and long-term price linkages among the dual- and triple-listed Chinese securities in different stock markets over the period of 1993–2008. The empirical results reveal that most of the dual-listings traded in China A- and B-share markets, and the Hong Kong and New York stock markets exhibit a stationary long-run relationship. Some of the dual-listed China A- and H-share also exhibit cointegrated relationship. The results also suggest that Hong Kong and New York markets have a very strong interactive relationship in terms of the dual- listed stocks. The stock’s total return index series for those cross-listed Chinese stocks are cointegrated and pricing errors are corrected almost immediately. Lastly, arbitrage opportunities for the 14 pairs of Chinese American Depository Receipts (ADRs) and their underlying shares traded in New York and Hong Kong markets were examined. It was revealed that a portfolio of 14 dual listed stocks earns an average daily return of 1.28 per cent over the period studied when transaction costs were considered and market risk was controlled. This study contributes to the literature on the bonding hypothesis and firm valuation on cross-listing by constructing an integrated conceptual framework that explains why the bonding effect might not have explanatory power for all the cross-listed Chinese firms. As an exploratory study of corporate governance of Chinese cross-listings and investment strategy, this study also provides researchers with theoretical and methodological implications for future studies in this line of research. Further, it also proves that arbitrage opportunities existed for some of the dual-listed shares but risks are also associated with it. v Abbreviations -2LL -2 times log-likelihood ADF Augmented Dickey-Fuller ADR American Depository Receipts ANOVA Analysis of Variance ASEAN Association of South East Asian Nations AIM Alternative Investment Market CAPM Capital Asset Pricing Model CAR Cumulative Abnormal Return CEO Chief Executive Officer CPA Certified Public Accountant CSRC China Securities Regulatory Commission G5 Group of Five. The G5 members are: France, Germany, Japan, the United Kingdom and the United States GAAP Generally Accepted Accounting Principles GDP Gross Domestic Production GDR Global Depository Receipt GEM Growth Enterprise Market IAS International Accounting Standard IFRS International Financial Report Standard IPO Initial Public Offerings KOSDAQ Korea Securities Dealers Automated Quotation System LOP The Law of One Price NAFTA North American Free Trade Agreement NASDAQ National Association of Securities Dealers Automated Quotations OTC Over the Counter QDII Qualified Domestic Institutional Investors QFII Qualified Foreign Institutional Investors RI Return Index RMB Chinese currency, Renminbi, with a notation of ¥ ROA Return on Asset ROE Return on Equity SEC US Securities and Exchange Commission vi SFC Securities and Futures Commission SFRS Singapore Financial Reporting Standards SL Security Line SML Security Market Line SOE State-Owned Enterprise ST Special Treatment UK United Kingdom US United States VAR Vector Auto Regression vii Contents Declaration ........................................................................................................................ ii Acknowledgements .......................................................................................................... iii Abstract ...........................................................................................................................