Cross-listing and valuation differences between the Hong Kong and the Chinese stock markets

Abstract

PURPOSE OF THE STUDY The purpose of this study is to investigate cross-listing and valuation differences between the Chinese and the Hong Kong stock markets. Majority of the cross-listing literature is focused on US and UK stock markets due to the large amount of cross-listings. However, there has been considerable cross-listing activity from China to Hong Kong since the beginning of the 21st century. In addition, the Chinese stock market is relatively young and has many restrictions originating from the socialist history of the country. Therefore the cross-listings from China to Hong Kong offer an interesting framework to study the phenomenon. The main focus of this study is to find out whether cross-listings add and whether their share classes in Hong Kong reach the valuation of Hong Kong peers. In the academic literature related to the cross-listing these issues are called ‘cross-listing premium’ and ‘cross-listing discount’, respectively.

DATA AND METHODOLOGY The data set consists of all the companies listed in the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the Hong Kong Stock Exchange between 2001 and 2010. When the data was retrieved the amounts of companies listed in the exchanges were in total 970, 1419 and 1479. The main focus is on the 164 H-shares. H-shares are stocks of the Chinese companies listed on the Hong Kong Stock Exchange. 70 of those companies have cross-listing; listing in Shanghai/Shenzhen as well as in Hong Kong. Following previous literature, Tobin’s Q is utilized to act as a proxy for company valuation. There are four hypotheses constructed based on the previous literature and then hypotheses are tested with OLS regression. The model is controlled with a set of independent variables influencing company valuation. All the data was retrieved from Thomson One Banker and Datastream.

RESULTS The set of hypotheses are mainly supported by the results. The first hypothesis and the test cover the relative valuation between the Chinese and the Hong Kong stock markets. The Chinese stock markets are found to be more highly valued when compared to the pure Hong Kong companies in the Hong Kong Stock Exchange. The cross-listed H-shares offer a possibility to study the valuation of different share classes of the same companies. Second hypothesis states that the Chinese share class is more expensive and the tests give support for the hypothesis. Interestingly evidence indicates that the same company, with same cash-flow and voting rights, is valued differently within the Chinese and the Hong Kong stock markets. Third hypothesis tests whether cross-listing is value adding in China. The results support the hypothesis. However, when the test covers only large companies the cross-listing premium seems not to exist. Last hypothesis assumes that the H-shares do not reach the valuation of other Hong Kong shares. The tests give support for the hypothesis and there is evidence for the cross-listing discount in China and Hong Kong framework.