The informativeness of domestic and foreign investors’ stock trades: Evidence from the perfectly segmented Chinese market

This paper uses the perfect market segmentation setting in China’s stock market to compare the information content of the stock trades of domestic and foreign investors. We study 76 firms that issue both A-shares (for domestic investors) and B-shares (for foreign investors) and compare the price discovery role of the two segmented markets in China. Before Feb 19, 2001, the A-share market led the B-share market in price discovery, as the signed volume and quote revision of the A-share market had strong predictive ability for B-share quote returns, but not vice versa. After Feb 19, 2001, because some domestic investors were allowed to invest in the B-share market, we find evidence for a reverse causality from the B-share to the A-share market. Nevertheless, the [Hasbrouck (1995). One security, many markets: determining the contributions to price discovery, Journal of Finance 50, see front matter r 2007 Elsevier B.V. All rights reserved. .finmar.2007.07.001 hors thank Bruce Lehmann (the editor), an anonymous referee, and participants at the 2003 inance Association Meetings in Glasgow and 2004 China International Finance Conference in e are grateful to Netherlands Organization for Scientific Research (NWO) for a VENI grant, AusAid, FC (Project Number: 70142003), Erasmus University Rotterdam, Earmarked Grants of the ants Council of Hong Kong (HKUST6135/02H), and NSFC (Project Number: 70103002) for port. We are grateful to Songyao Yao for his research assistance. An earlier version of the paper was Domestic Investors Better Informed than Foreign Investors: Evidence from the Perfectly Segmented l remaining errors are solely the authors’ responsibility. nding author. Tel.: +852 2358 7680; fax: +852 2358 1749. dress: [email protected] (K. Chan).