Asset pricing in segmented capital markets : preliminary evidence from China-domiciled companies

A number of Chinese companies have issued shares to investors within China (A shares) and issued shares to foreign investors (B, H, and N shares). All these shares have equal rights although A shares can only be sold to, and traded among, PRC citizens and B, H, and N shares can only be issued to, and traded among, foreign investors. The paper examines the impact of the initial listing of B-share issues on the prices of already listed A shares. Our analyses test the joint characteristics of market segmentation and seasoned equity offerings. We find that the abnormal returns on A-share companies that also offer B shares are significantly negative, a result consistent with the hypothesis that the demand curve for equity shares is downward sloping. Interestingly, these negative abnormal returns can be explained by our proxies for the investor recognition theory of Merton (1987) and the liquidity theory of Amihud and Mendelson (1986).