Impact of Cross-Listing Chinese Stock Returns. A and N Shares Rate of Return Comparison

TL;DR

This study analyzes how cross-listing Chinese stocks as ADRs affects their returns and volatility, revealing increased risk during financial crises and negative market reactions on listing dates.

Contribution

It applies CAPM and GARCH models to compare A and N shares, providing new insights into cross-listing impacts on Chinese firms during financial turmoil.

Findings

N shares were more affected by the 2007-2008 financial crisis.

Significant negative abnormal returns on ADR listing dates.

Increased volatility observed in some local shares post-cross-listing.

Abstract

The paper examines the Chinese market reaction to the ADR issue by comparing returns and their stochastic variances of the Chinese firms cross-listed in the U.S. stock market. First, It was implemented capital asset pricing model (CAPM) to determine expected returns A and N shares. The CAPM provided with a methodology to quantify risk and translate that risk into estimates of expected return on equity. Overall findings document that N shares of Chinese entities listed on U.S. market were greatly affected by economic turmoil during the period of World Financial Crises 2007-2008 than the A shares listed on the local market. After in order to test the hypothesis of beneficial cross-listing, it was implemented an event study method and the returns was modeled following GARCH process, which assumes homoscedasticity in residual returns. The results indicate a significant negative abnormal market return on an ADR listing date. The return volatilities after the listing date are compared to those before the listing. Four out of ten companies experienced increased volatility of local return after the cross-listing. Keywords: cross-listing, ADR, rate of return, volatility, CAPM, GARCH model, N shares, A shares