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B-share discount puzzle in China: a revisit of dual-share firms

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Abstract

This paper revisits the B-shares discount puzzle for dual-class shares in China. The major finding shows that the Shanghai stock market experiences a greater downward correction in stock prices and the discount rate of B-shares diminishes after the B-shares’ opening, but, in the long run the price discounts of B-shares persist. The stock returns of dual-class firms in both Shanghai and Shenzhen B-share markets have negative abnormal returns during the opening event, and then reverse into positive ones markedly in the long run. The investors’ trading activities are sensitive to the number of board members and state-ownership structures. In addition, the return spillover from the sample B-share to the A-share index obviously accelerates and the impact persistence is shortened.

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Notes

  1. A-share and B-share markets were completely segmented from each other before February 2001 when A-shares could only be owned by domestic investors and B-shares were legally accessible to international investors only. In China, more than 70% of listed companies in the B-share market have also issued A-shares on both stock exchanges, thus incurring different stock prices.

  2. The China Securities Regulatory Commission (CSRC) further proclaimed the opening of the A-share market by employing a Qualified Foreign Institutional Investors scheme on November 7, 2002; see Gao and Kling (2006) for the detailed regulatory changes from 1990 to 2002.

  3. Fernald and Rogers (2002) address this anomaly in their “Puzzles in the Chinese Stock Market” and Bailey et al. (1999) refer to it as “The Strange Case of China.”

  4. Nevertheless, this paper does not focus only on the dual-shares firms.

  5. These 40 dual-share firms issue both A- and B-shares during our sample period.

  6. According to the release of CSRC, the Shanghai and Shenzhen exchanges halted B-share trading on Monday afternoon (February 19, 2001). The halt remained in effect for the rest of the week until February 27, 2001, ahead of the announcement, but not before rumors of the reform started spreading through the market.

  7. The application of the classical event study methodology, without checking the behavior of securities’ returns for stochastic beta and GARCH (Generalized Autoregressive Conditional Heteroskedasticity) effects, may very well cause researchers to draw inappropriate conclusions, as Brockett et al. (1999) point out. Cao and Tsay (1992) and Corhay and Rad (1996) find that the GARCH-family models are superior to the OLS models.

  8. In the presence of clustering, sample observations may not be independent, and traditional standard errors may be biased. Moulton (1990) demonstrates how clustering within a group biases estimated standard errors downward, and hence to address this concern we correct standard errors using the procedure described in Wooldridge (2002, pp. 405–410). EGARCH (1, 2), EGARCH (2, 1), EGARCH (2, 2), and Fama–French three-factor (FF3F) models are employed for robustness check. The abnormal returns calculated by these models are available upon request.

  9. We also try a 260-day pre-event window, and the results are similar.

  10. Dummy variable SOE equals one if the percentage of shareholding by the state is higher than 50% and is zero otherwise.

  11. For example, Yermack (1996) documents an inverse relationship between board size and firm value. Cheng (2008) and Darrat et al. (2010) indicate that firms with larger boards have lower variability of corporate performance. Zahid and Shekar (2002) find a large impact of stock returns on subsequent insider transactions. Li and McNally (2007) indicate that abnormal return may be attributable to private information. Reburn (1994) argues that insiders of smaller firms can earn larger abnormal returns than insiders of larger firms. Bai et al. (2004) find that large holdings by the largest shareholders have negative effects on the firm’s market valuation. Xu and Wang (1997) report that, a positive (negative) relationship prevails between ownership concentration (state shares) and firm performance. Wang and Iorio (2007) show size has the most significant effect in capturing variations in stock returns. Finally, Wei et al. (2005) discover there is a significant relation between ownership structure and firm value; Fan and Wang (2017) indicate that corporate governance is an important determinant of the A-H share premium. There is extensive evidence in the literature that trading by corporate insiders can generate abnormally high returns (Seyhun 1986, 1992). We convert B-shares price to Chinese Yuan and compile value-weighted indices for dual-share firms of SHSE and SZSE respectively to measure the price discount rate, which equals to 1- (B-shares index/A-shares index).

  12. We followed the index construction and selection of constituent stocks by China’s first index expert committee.

  13. The sample period for the SVAR analysis is chosen to avoid possible impacts by the opening of the A-share market in November 2002.

  14. We attempt to estimate a VAR with other possible orderings as well, but the conclusions do not change.

  15. After screening the results of event window (− 30, 30), we only display the results of window (− 10, 15) since we find no significant abnormal returns beyond window (− 10, 15). The overall results are available upon request.

  16. Due to space limitation, these results are not reported in the paper. They are available upon request.

  17. Due to lack of data availability, we have no data on the insider trading behavior of board members in the regression model.

  18. For robustness, we also examine the impact of A-share prices on B-share prices; however, there is no significant change before and after deregulation.

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Authors and Affiliations

  1. Department of Economics, University of Texas at San Antonio, San Antonio, USA

    Donald Lien

  2. Department of Economics and Finance, Lamar University, Beaumont, USA

    Chun-Da Chen

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  1. Donald Lien
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Correspondence to Chun-Da Chen.

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Lien, D., Chen, CD. B-share discount puzzle in China: a revisit of dual-share firms. Rev Manag Sci 14, 1047–1075 (2020). https://doi.org/10.1007/s11846-018-0324-x

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