On price difference of A+H companies. Issue 2 (5th April 2022)

• Record Type: Journal Article
• Authors: Liu, Yang; Haw, In-Mu
• Is Part Of: Zhong Guo Hui Ji Yu Cai Wu Yan Jiu. Volume 24:Issue 2(2022)
• Page Start: 199
• Page End: 225
• Publication Date: 2022-04-05
• Subjects: Cross-listing -- Chinese A and H shares -- Price difference -- Earnings quality -- IFRS -- Myopic investor -- Short sell; Periodicals
• DOI: 10.1108/CAFR-02-2022-0012
• Languages: English
• ISSNs: 1029-807X

Abstract

Abstract : Purpose: For Chinese companies that cross-list in Chinese A share and Hong Kong (H share) markets, the H share price has been consistently lower than the A share price by an average of 85% in recent years. This is puzzling because most institutional differences between the two markets have been eliminated since 2007. The purpose of this study is to explain the puzzle of the price difference of A+H companies. Design/methodology/approach: Using all A and H share Chinese firms in the period 2007–2013 and a simultaneous equations approach, this study identifies three new explanations for the recent price difference. Findings: First, utilizing a unique earning quality measure that is directly related to non-persistent components of fair value accounting under International Financial Reporting Standards (IFRS), this study finds that the lower the earnings quality, the lower the H share price relative to the A share price, and hence the greater the price difference. Second, the higher the myopic investor ownership in A share firms, the larger the A share price relative to the H share price. Third, the short-selling mechanism introduced to the A share market since 2010 helps reduce the price difference. Originality/value: First, this study identifies three new explanations for the puzzle of the AH price difference which remains substantial even after the institutional and accounting standards differences between the two markets were eliminated. Second, we examine the impact of the implementation of fair value accounting under IFRS in an emerging market on the pricing difference of cross-listed shares and reveal that it can induce an unintended negative consequence on the pricing difference of cross-listed shares. Third, this study contributes to the literature on short sales by providing its mitigating role in pricing differences across two different markets. Finally, this study makes improvements in research design, which utilizes a unique measure of earnings quality that is directly related to the implementation of IFRS and a simultaneous equations approach that minimizes endogeneity concern.