Liberalization and asymmetric information flow dynamics in the Chinese equity markets

In this study, we empirically analyze the dynamic feedback mechanism between the A- and B-markets in the Chinese stock exchanges in an attempt to offer insights into the evolution of the information environment and the subsequent behavior of the B-share discount following the liberalization of these markets in 2001–2002. More specifically, we examine price discovery, level of informed trading, and their relationship to firm-specific asymmetric information proxies in the A- and B-markets in both the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) for the time periods before and after the liberalization events. Based on return spillovers between the A and B markets, we find that the A-market dominates the price discovery process in the pre-liberalization period but in the post-liberalization period the B-market becomes the prevailing source of information production and flow. Similarly, the level of informed trading captured by the volume-return spillover effects is higher in the A-market in the pre-liberalization period but it is the B-market that is dominated by informed traders in the post-liberalization period which explains, at least partially, the subsequent significant reduction in the B-share discount. Furthermore, the degree of firm-specific information asymmetry has a significant impact on return and volume-return spillovers only in the B-to-A direction in the post-liberalization period, suggesting that trading in the B-market was predominantly prompted by informational or speculative considerations during that period. The structural change in the information environment effectuated by the liberalization events in 2001–2002 is consistent with the asymmetric information hypothesis and has policy implications for improving informational market efficiency in the Chinese capital markets.