Corporate Governance And Market Segmentation: Evidence From The Price Difference Between Chinese A And H Shares

This paper empirically examines the determinants of the price difference between Chinese A shares which are traded in the domestic market, and their matching H shares which are traded in the Hong Kong market. The authors find that Chinese firms' proportion of non-tradable shares, a measure of controlling shareholders' ability to extract private benefits, is an important factor that determines the A-H share price difference. This result is robust after controlling for factors such as differences in required returns, stock demand elasticity, market-portfolio returns, liquidity, asymmetric information, and degree of speculation between domestic and foreign markets. The findings highlight the importance of corporate governance in explaining the price difference in segmented stock markets.