Effects of differences of opinions and short‐sale constraints on the dual listed Chinese shares

Abstract

Purpose

The purpose of this paper is to study the effects of short‐sale constraints and differences of opinions on the price premium of dual listed Chinese A‐H shares.

Design/methodology/approach

The analysis mainly follows the Miller's model, which indicates that the relaxation of stringent short‐sale constraint could reduce the upward bias in stock prices. Following the literature, the paper uses the idiosyncratic return volatility and monthly turnover rate as two main proxies of differences of opinions.

Findings

This study shows that the high level of A‐share differences of opinions will lead to the high price premium of A‐share portfolio with the short‐sale constraint in the A‐share market. However, the high level of H‐share differences of opinions has no effect on the price premium of H‐share portfolio and has also positively contributed to the A‐share price premium. The price premium of shorted A‐share portfolio is declined more significantly than those of non‐shorted ones after the relaxation of short‐sale constraint in the A‐share market.

Research limitations/implications

The findings in this study provide further evidence that dual listed Chinese A‐shares with high level of differences of opinions and short‐sale constraints tend to be overvalued.

Practical implications

This study supports Miller's hypothesis that with the control of short‐sale constraint, the high level of differences of opinions could lead to the high degree of overvaluation of A‐share portfolio. The market capitalization and book‐to‐market ratio of A‐shares also generate significant positive effect to the A‐share price premium. Finally, the introduction of short‐sale mechanism in A‐share market could partially eliminate the mispricing of dual‐listed A‐shares and improve the price efficiency of A‐share market.

Originality/value

This study is mainly focused on the joint effects of differences of opinions and short‐sale constraints on the A‐share price premium. The new short‐sale policy in A‐share market in March 2010 provides us an opportunity to study the effect of relaxation of stringent short‐sale constraint on the A‐share price premium. In the literatures so far, all studies assumed A‐shares are strictly prohibited to be sold short.

Citation

Fang, Z. and Jiang, X. (2013), "Effects of differences of opinions and short‐sale constraints on the dual listed Chinese shares", China Finance Review International, Vol. 3 No. 1, pp. 61-89. https://doi.org/10.1108/20441391311290785