Media Control: A New Resolution of the Foreign Share Discount Puzzle in China

45 Pages Posted: 31 May 2016

See all articles by Rong Ding

Rong Ding

NEOMA Business School

Wenxuan Hou

University of Edinburgh - Business School

Yue (Lucy) Liu

University of Edinburgh Business School

John Ziyang Zhang

University of Liverpool

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

Suggested Citation

Ding, Rong and Hou, Wenxuan and Liu, Yue (Lucy) and Zhang, John, Media Control: A New Resolution of the Foreign Share Discount Puzzle in China (May 30, 2016). Available at SSRN: https://ssrn.com/abstract=2786687 or http://dx.doi.org/10.2139/ssrn.2786687

Rong Ding

NEOMA Business School ( email )

1 RUE DU MARECHAL JUIN-BP215
MONT-SAINT-AIGNAN CEDEX, 76825
France

Wenxuan Hou (Contact Author)

University of Edinburgh - Business School ( email )

29 Buccleuch Place
EDINBURGH, Scotland EH89JS
United Kingdom

Yue (Lucy) Liu

University of Edinburgh Business School ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

John Zhang

University of Liverpool ( email )

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