Short-Term Dynamic Transmission and Long-Term Foreign Share Discount: Evidence from the Chinese Stock Markets (Company Overview) (Report‪)‬

ABSTRACT This study concerns the information transmission between Chinese A and B share classes, and the discount effect of B shares. We first examine the short-run dynamic transmission of information flow between A and B shares using a bivariate GARCH framework that jointly models the first and second moment of stock returns from both share classes. We find that there are significant positive return transmissions and volatility spillovers across Chinese A and B shares, and that the information flow transmissions from B to A shares are stronger than the transmissions from A to B shares. However, empirical results show that cross-market volatility spillover effects are still much weaker than the A B share own-market volatility spillover effects, suggesting that A and B share prices may be driven by different underlying forces. We then formulate an empirical model to investigate the financial determinants of long-term foreign B share price discount. Our results show a significant negative relationship between B share percentage price discount and company annual earnings, suggesting that foreign investors tend to react more strongly to weakness in the listed company's ability to generate earnings. Company ownership structure and capital structure are also found to have significant relationship with the B share price discount.