Are Domestic Investors Better Informed than Foreign Investors? : Evidence from the Perfectly Segmented Market in China

This paper uses the perfect market segmentation setting in China's stock market to examine whether foreign investors are at informational disadvantage relative to domestic investors. We analyze the price discovery roles of the A- (domestic investors) and B-share (foreign investors) markets in China using a new database of transactions data. Before Feb 19, 2001, the A-share market leads the B-share market in price discovery - the signed volume and quote revision of the A-share market have strong predictive ability for B-share quote returns, but not vice versa. After Feb 19, 2001, because some domestic investors are allowed to invest on the B-share market, we also find evidence for a reverse causality from the B-share to the A-share market. Nevertheless, the Hasbrouck (1995) information share analysis reveals that A-shares continue to dominate price discovery.