Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount





    Search for more papers by this author
    • Chan is from the Department of Finance, Hong Kong University of Science and Technology. Menkveld is from the Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam. Yang is from the School of Economics and Management, Tsinghua University. We thank Yakov Amihud, Y. Peter Chung, Thierry Foucault, Tse-Chun Lin, Marco Pagano, Lasse Pedersen, Robert F. Stambaugh (the editor), Avi Wohl, two anonymous referees (including an associate editor), Wei Xiong, and participants at the 2003 Western Finance Association (WFA) conference in Los Cabos, Mexico, the 2003 European Finance Association (EFA) conference in Glasgow, Scotland, the 2003 CEPR Studienzentrum Gerzensee European Summer Symposium in Financial Markets, Gerzensee Switzerland, the 2003 Eastern Finance Association conference at Lake Buena Vista, Florida, the 2004 Conference that was organized by the Shanghai University of Economics and Finance, Shanghai, the 2004 CAFR Symposium that was organized by the Hong Kong Polytechnic University and Tsinghua University, Hong Kong, and the 2005 Norges Bank conference on Microstructure of Equity and Currency Markets, Oslo, and seminar participants at Paris-Dauphine. An earlier version of the paper received the outstanding paper award at the 2003 Eastern Finance Association conference. We are grateful to Netherlands Organization for Scientific Research (NWO) for a VENI grant, AusAid, CCUIPP-NSFC (Project Number: 70142003), Erasmus University Rotterdam, Earmarked Grants of the Research Grants Council of Hong Kong (HKUST6135/02H), and NSFC (Project Number: 70103002) for financial support. We are also grateful to “Todd” Xia and Songyao Yao for their research assistance. The usual disclaimer applies.


We examine the effect of information asymmetry on equity prices in the local A- and foreign B-share market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross-sectional variation in B-share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid-ask spread in the A- and B-share markets explains 44% and 46% of the variation in B-share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables.