A Research On Factors Affecting The Price Discrepancy Between Dual-Listed A-H Companies

Tsingtao Brewery Co., Ltd became the first A-H dual-listed company in 1993 by going public on both A share market and H share market successively within around forty days. Since then, A shares of A-H companies have been showing premium on their H shares, starting from IPOs. Nevertheless, for the first time, Sinopec Shanghai Petrochemical Company Limited showed the reverse phenomenon, breaking the usual case of A shares having premium on H shares of an A-H company. Therefore, it seems there is no rule to follow any more and the price discrepancy between A shares and H shares of an A-H company seems more and more complicated. Based on theoretical and empirical study, this paper explores the factors that cause the price discrepancy between A shares and H shares of an A-H company and the extent to which each of those factors can impact the price discrepancy. This paper aims to provide some references for reducing the impact of market segmentation, for achieving price connection of different markets, for expediting the establishment of international standards in our capital market and for promoting the interconnection of capital markets.Firstly, this paper divides the development of price discrepancy between A shares and H shares into five periods. Year 1990-1995: A shares were favored by domestic capital and began to show premium; year 1996-2001: people were at fever pitch about A shares and the price of A shares grew irrationally to even hit the premium of 1394% once; year 2002-2005: American dotcom bust made the premium of A shares fell in the bear market; year 2006-2008: the premium of A shares, which was suppressed for a long time in the bear market, showed an explosive rally, but the implementation of QFII helped to make the premium of A shares to rally rationally; year 2008-2014: the global financial tsunami forced the premium of A shares to be rational, but share valuations in the two markets began to differentiate, and the price discrepancy between A shares and H shares was frequently seen inversed. Furthermore, with IPO reference price as the bench mark, this paper compares the IPO prices of A shares with that of H shares. This paper also clearly explains the complexity of the development of price discrepancies of the sample companies within the research periods according to the specific industries that those companies belong to.Secondly, this paper reviews the previous studies in this aspect and illustrates the seven factors that cause the price discrepancy between A shares and H shares of an A-H company, including information asymmetry, difference in liquidity, difference in demand elasticity, difference in investment philosophy, difference in systematic risk, non-tradable shares reform and the start of the Shanghai-Hong Kong Stock Connect. This paper designs the variables based on theoretical analysis, selects 34 A-H companies as sample companies and does an empirical study based on panel-data model. Based on quantitative analysis, this paper concludes that the aforementioned seven factors do have an impact on the price discrepancy between A shares and H shares of an A-H company, that the impact of information asymmetry, difference in demand elasticity, difference in systematic risk and non-tradable shares reform on the price discrepancy is significant while the impact of difference in investment philosophy is little and that difference in liquidity has a little impact on financial industry but has a significant impact on non-financial industries.Finally, based on theoretical analysis and empirical study, this paper offers five suggestions to improve the operation mechanism of the domestic market and to promote the interconnection of capital markets. The first one is to improve information disclosure mechanism by enhancing the transparency, timeliness and adequacy of information disclosure. The second one is to accelerate innovation of financial products so as to enrich product supplies in domestic market. The third one is to increase the proportion of institutional investors in A share market and to guide them to invest rationally. The fourth one is to provide more education for investors and to gradually establish the investment philosophy of long-term value. The fifth is to introduce the arbitrage mechanism and to promote two-way flow of funds between the two markets.