A theoretical analysis on H-share discount

a r t i c l e i n f o In this paper, I investigate the determinants of price differences in the shares of cross-listed firms in domestic and foreign markets. Diverging from the literature in this field, I introduce a methodology that is independent of any specific form of utility function. My theoretical analysis indicates that investment opportunities and consumption growth cause price disparities between the domestic and foreign shares of cross-listed firms. First, I show that stocks are overpriced in the local market if and only if other domestic investment opportunities are riskier and have a lower expected return than those available in foreign markets. Second, I show that domestic shares are overpriced if and only if the aggregate consumption or consumption growth in the domestic economy is smaller than that in the foreign economy. Approaches in this paper can not only explain H-share discount but also any other cross-listed price disparity. From the founding of Shanghai Stock Exchange and Shenzhen Stock Exchange in the early 1990s, because of the difficulty to procure listings on the Shanghai and Shenzhen Stock Exchanges, and seeking a " dressing-up " effect (Busaba et al., 2012) as well, many companies went abroad for public offerings. Tsingtao Brewery is the first company listed in Hong Kong Exchanges and Clearing Limited in 1993. This is the first H-share. After 1997, Chinese stocks became sought-after investments in the Hong Kong market due to their strong performance during the Asian financial crisis. At the same time, major exchanges around the world expressed their keen interest in Chinese issuers. Together, this fueled a rapid increase in the number of Chinese stocks listed in foreign markets. Besides H-share, similar cases are as follows, N-share is those listed in New York Stock Exchange, L-share is stock listed in London Stock Exchange, and S-share is those listed in Singapore Exchange. With the improving of Chinese company financing opportunity, these firms returned to Chinese mainland stock market for meeting further capital demands. This is so called cross-listing, which has been an important part of Chinese capital market now. Among those cross-listing companies, A + H share is the most principal representative. They have not only been an important part of Hong Kong capital market, but also an efficient and necessary complement to Chinese mainland security market. A + H cross-listing contributes a lot in attracting foreign investment, promoting foreign investor …