An Empirical Study On Chinese A-B Share Premia Based On Investor Sentiment

After Chinese B share markets were opened up to domestic investors on 19 th February 2001, there remained price premia between A and B shares. Because of the sudden change brought on by this event to Chinese stock markets which were characterized by its segmentation, the original empirical hypothesis and approaches might be confronted with a great many challenges. Long-term B share price discount has been noticed and explored by many scholars, but most of the research is based on traditional financial theories. Lately, certain progresses are made in the field of behavior finance, yet they don’t generally focus on cross-listing companies, which is what we are trying to compensate with our research. Finally, besides theoretical factors, there might also be possible institutional factors underlying this phenomenon provide the unique institutional background of the Chinese markets.Before actually study the sentiment on B share price discount, we compare the sentiment effect of A shares with B shares. Using principle component analysis, we are able to compose A and B share sentiment. Empirical results show significant differences between A and B share sentiment-return relations during Jan. 2003 to Dec. 2013. We find that there’s a clear negative correlation between sentiment and market return in B shares while in A shares, the correlation is positive. Also, market return has positive influence on both A and B share sentiment.In the next part, we factor relative sentiment into the study of B share price discount. Result shows that not only does sentiment have significant explanatory power towards price discount, so do many other hypothesis such as liquidity, demand elasticity, information asymmetry and investor belief. Besides, factors such as non-tradable shares reform and the location where companies go public can also attribute to the share price differences between A and B shares.