U.S. cross-listing and China's B-share discount

In contrast with price premium for foreign shares in other countries, China's foreign shares (B-shares) are unique in that they are traded at a large discount from their domestic shares (A-shares). We examine how the presence of Chinese stocks in the U.S. affects this discount. We extend the substitution effect of Sun and Tong [Sun, Q., Tong, W.H.S., 2000. The effect of market segmentation on stock prices: the China syndrome. Journal of Banking and Finance 24, 1875-1902] and find that the number and trading volume of Chinese firms traded in the U.S. are also significantly negatively related to the B-share premium. The substitution effect from these stocks is stronger than that from Chinese stocks listed in Hong Kong. For a smaller sample of Chinese firms with B-shares cross-listed in both the U.S. and China, we find the presence of a counteracting effect as a result of such listing. We utilize the methodology of Domowitz et al. [Domowitz, I., Glen, J., Madhavan, A., 1998. International cross-listing and order flow migration: evidence from an emerging market. Journal of Finance 53, 2001-2027] and find that the home market price volatility of these stocks is significantly reduced as a result of the cross-listing, but that the cross-listing has no impact on the home market liquidity.