Market segmentation and relative supply of domestic and foreign shares: evidence from China stock market

Abstract

In China, domestic firms can issue A and B shares Domestic investors can only invest A shares while foreign investors can only hold B shares Unlike other emerging markets, domestic A shares are sold at premium relative to domestic A shares. We conjecture that the premium of domestic A shares is due to the limited alternative investment available to retail investors. Consistent with our hypothesis, empirical evidence indicates that cross-sectional variation of the premia of A shares is negatively related to the relative supply of A shares, and positively related to the relative of B shares. We also find that shares in circulation (effective supply of shares) is a better proxy than the total shares outstanding (total supply of stocks) in explaining the premia Finally, there is little evidence that the premia is explained by the beta risk and liquidity risk.