Media Control: A New Resolution of the Foreign Share Discount Puzzle in China
45 Pages Posted: 31 May 2016
Date Written: May 30, 2016
Abstract
This paper studies the long-standing puzzle of foreign share discount in China by examining how news perception, which is distorted by media control, influences the discount of foreign B-shares to local A-shares from the same firms. We predict that the government control of Chinese media censors negative news and stresses good news, in turn leading to the premium on A-shares. To perform the analysis, we first classify the news based on recipients’ perceptions in an experiment and find that the ratio of positive to negative (perceived) news is substantially higher for Chinese newspapers than English newspapers. Such favoritism inflates the price of domestic shares and increases foreign share discounts. Furthermore, we find that foreign investors react to the negative news in Chinese newspapers more negatively than domestic investors do.
Keywords: China; cross-listed firm; foreign share discount; media coverage; tone of media
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