Chinese cross-listed firms : A study about the relations between cross-listed A & B shares and A & H shares

Abstract: Abstract: This paper investigates the hidden relations between the Chinese cross-listed firms in the Shanghai and Hong Kong stock exchanges. In China, stocks are classified into four categories: A shares, B shares, H shares and ADR shares. A and B shares are traded on China’s two stock exchanges, namely Shanghai and Shenzhen Stock Exchanges while H and ADR shares are traded in Hong Kong and the USA respectively. A shareholders consist of mainly domestic investors with a fraction of foreign investors; B shareholders are however, a mixture of Chinese and international shareholders; H and ADR shares are targeted only towards international investors. A firm can only choose to cross-list A and B shares or A and H shares. 21 companies that have cross-listed A and H shares and 44 companies that have cross-listed A and B shares during the timeframe between July, 2001 and June, 2006 have been studied. We have retrieved closing prices on the 20th of every month and using the general mathematical approach involving log-returns, the expected monthly returns, variances and covariances have been estimated. Our results for A and B cross-listed firms show that the monthly returns are in the same and have reasonably high correlations. The results for A and H cross-listed firms however, show that the expected returns of the H shares are of higher magnitude than the A shares and that they show significantly lower correlations. The reason behind these results seems to be a consequence of the deviant behaviour of the B share market in comparison to the international market, together with the hypothesis that B shares lead A shares.