Speculative Trading and Stock Prices An Analysis of Chinese AB Share Premia.pdf

Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia∗ Jianping Mei, Jos´e A. Scheinkman and Wei Xiong February 3, 2004 Abstract China’s stock markets, with stringent short-sales constraints, dominance of inexperi- enced individual investors, a small asset float and heavy share turnover (500% per year despite a high transaction cost), provide a unique opportunity to study non-fundamental components in stock prices. In particular, several dozen Chinese firms offered two classes of shares: class A, which could only be held by domestic investors, and class B, which could only be traded by foreigners. Despite their identical rights, A-share prices were on average 400% higher than the corresponding B shares. By adopting a panel regression method to control for discount rate effects, we find that the turnover rate of A shares is able to explain 20% of the cross-sectional variation in A-B share premium, suggesting speculative trading as an important determinant of stock prices. We also control for liq- uidity effects, conduct various specification analysis, and examine the relationship among asset float, turnover rate, and volatility. ∗Mei is at Stern School of Business, New York University. Scheinkman and Xiong are at the Department of Economics and the Bendheim Center for Finance, Princeton University. Scheinkman thanks the National Science Foundation and The Blaise Pascal Research Chair for research support. We thank Yacov Amihud and Ed Glaeser for valuable suggestions, and Chunhui Miao and Aureo de Paula for able research assistance. We are grateful to Ming Cai, Kent Hargis, Shenzhen GTA Information Technology Inc. and Boshi Fund Management Company for providi