Bridge over ocean
1 July 2016 CFA Institute Journal Review

Are Stock Price More Informative after Dual-Listing in Emerging Markets? Evidence from Hong Kong-Listed Chinese Companies (Digest Summary)

  1. Sadaf Aliuddin, CFA

The stock price information value and liquidity conditions of Hong Kong–listed Chinese companies change once they dual list, or subsequently list, on mainland China markets. The authors investigate three factors that could have an impact on this phenomenon: stock price synchronicity, liquidity commonality, and stock liquidity.

What’s Inside?

The authors’ objective is to investigate the changes in information and trading quality when Chinese firms listed on the Hong Kong Exchange (H-shares) dual list on the comparatively less developed stock exchanges in China (A-shares). They narrow their focus to three variables: stock price synchronicity, liquidity commonality, and stock liquidity and explore three channels that are likely affecting such variables. The authors conclude that the additional coverage produced by the A-share listing influences stock liquidity but not price synchronicity or liquidity commonality. Furthermore, trading by domestic institutional investors influences all three factors, but trading by foreign investors influences price synchronicity and liquidity commonality but not stock liquidity.

How Is This Research Useful to Practitioners?

The authors contribute to the literature on cross-listing by investigating the changes in information and trading quality using the example of Chinese and Hong Kong stock exchanges, with the Hong Kong stock exchange more transparent and developed and not dominated by retail investors or government intervention. The results of the study should be taken into account while considering the pros and cons of market integration in terms of trading volumes, efficiency, and information availability, among other factors. The authors’ conclusion is that although market integration might enhance trading liquidity in the market, it does not necessarily lead to a more efficient information disclosure system or to more economical trading for investors seeking arbitrage opportunities. The results of the research should be of interest to regulators of capital markets.

How Did the Authors Conduct This Research?

The authors examine the synchronicity of stock prices, liquidity commonality, and individual stock liquidity after Hong Kong–listed Chinese companies reverse dual list in mainland China.
The authors gather the names and listing dates of A- and H-share dual-listed companies from the information given on stock exchange websites (i.e., the Shanghai and Shenzhen Stock Exchanges and the Hong Kong Exchange websites, respectively).
Their original sample includes 186 H-share companies listed on the Hong Kong Exchange between 1993 and 2012. Of those companies, 77 have A-shares also listed on one of China’s stock exchanges. The sample size excludes 19 companies that have an A-share listing that precedes their H-share listing as well as the 25 companies that are listed on the Growth Enterprise Market. The authors also drop companies with years of missing data. In total, regression analyses are conducted on 140 companies, of which 58 are dual listed.
Information for A-share stocks, including market returns, trading volumes, and firm-accounting information, is obtained from the China Stock Market and Accounting Research (CSMAR) database. The data for H-share firms, including stock prices and accounting data, are obtained from Datastream and the CSMAR database. The I/B/E/S database provides analyst coverage for both types of shares. Historical exchange rates between the Hong Kong dollar and Chinese yuan are also obtained from Datastream. Shareholding information is derived from individual firm-specific information available on the firm’s website. The list of central government state-owned enterprises is obtained from the website of the State-owned Assets Supervision and Administration Commission of the State Council. The authors also gather information on the percentage of foreign trading of H-shares among mainland China investors from the Hong Kong Exchange website.

Abstractor’s Viewpoint

The research is important from a regulatory perspective in formulating a strategy for integrating stock exchanges. But the hypothesis that cross-listing in domestic emerging markets increases information quality and enhances trading environments is not a certainty and must be evaluated empirically. From an investment professional’s point of view, company dual listings or stock exchange integration may offer easier access to shares or improve some forms of liquidity but may do nothing to improve market efficiency.

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