The theme of my dissertation is emerging capital markets behavior. I utilize three approaches: institutional, experimental and econometric to study the impact of reforms on capital allocation and stock market operation.In Chapter one, using a unique data set on Chinese provincial savings and investment, I prove that the torrent of reports about the inadequacies of the Chinese financial system, accompanied by studies claiming product and capital market segmentation, overlooks real achievements. While my aggregate results parallel those of Boyreau-Debray and Wei (2002) and others, I am able to assess the impact of financial innovation on capital flows outside the government allocation mechanism. Stripping out foreign funds, government appropriations, and officially influenced bank loans, I discover that inter-provincial commercial capital flows present a strong trend toward market integration and their mobility pattern starts to bear resemblance to interstate flows in the U.S. and other advanced nations. This result undercuts the widespread view of China's economy as lacking in domestic integration. Several emerging capital markets have adopted legally separated share markets (LSSM) in which local firms market separate claims to the same underlying dividend flow to two distinct sets of investors, domestic shareholders trading A shares with domestic currency and foreign investors trading B shares with foreign currency. I utilize an experimental approach to show that information transference across these segmented markets may have caused the covariance in A and B shares price movements. Our hypothesis is that. My results not only suggest that there is indeed information transmission across LSSM, but also indicate that the quality and clarify of signals sent out by the market with more information directly impacts the success of information transference. Chapter 3 takes an empirical approach to study the risk and return relationships of A and B shares with a standard CAPM model. I utilize CAPM models to directly estimate the betas of A and B shares listed in the Shanghai Stock Exchange. I find that domestic investors price asset risk as predicted by CAPM models, but foreign investors do so only for large and prominent Chinese firms with significantly better performance.
