Market Liquidity and Price Disparity: Evidence from Chinese Cross-Listed Firms

In this study, we investigate the association between stock liquidity and the H-share discount using a sample of Chinese cross-listed stocks in A- and H-shares markets. We examine the liquidity hypothesis by utilizing depth and trading activity and our results suggest that stocks with higher level in depth (active trading) of A-shares relative to H-shares are associated with less (more) H-share discount. Such effect is more pronounced in stocks that are non-state-owned and with low product market competition and ownership concentration. Moreover, we provide supportive evidence that the Stock Connect Program introduced in 2015 significantly dampens the association between stock liquidity and H-share discount. Overall, our findings highlight that the liquidity differences of cross-listed stocks explain large proportion of variation in price disparity.