A theoretical analysis on H-share discount

In this paper, I investigate the determinants of price differences in the shares of cross-listed firms in domestic and foreign markets. Diverging from the literature in this field, I introduce a methodology that is independent of any specific form of utility function. My theoretical analysis indicates that investment opportunities and consumption growth cause price disparities between the domestic and foreign shares of cross-listed firms. First, I show that stocks are overpriced in the local market if and only if other domestic investment opportunities are riskier and have a lower expected return than those available in foreign markets. Second, I show that domestic shares are overpriced if and only if the aggregate consumption or consumption growth in the domestic economy is smaller than that in the foreign economy. Approaches in this paper can not only explain H-share discount but also any other cross-listed price disparity.