Two Essays on Chinese Stock Market


Student thesis: Doctoral Thesis

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Awarding Institution
  • Junbo WANG (Supervisor)
  • Dongmin Kong (External person) (External Supervisor)
Award date20 Apr 2022


The pace of globalization has resulted in the rapid integration of Chinese stock markets into the global system. The unique institutional setting and policy practices of Chinese markets facilitate studies in asset pricing and corporate finance. In the context of Chinese stock markets, this thesis attempts to answer two important research questions: (1) is political uncertainty a new factor that can explain the change of A–H share premium? (2) Do foreign institutional investors affect controlling shareholders' tunneling.

Chapter 1 titled "Political Uncertainty and A–H Share Premium," explores new factors that can explain the change of A–H share premium from the perspective of political uncertainty. I use the turnover of city-level local leaders in Mainland China, and construct a measure of political uncertainty and use this measure to explain the change of A–H share premium. I find that political uncertainty significantly reduces A–H share premium. The reduction effect is low for the turnovers with low political uncertainty and more institutional ownership and strong for firms with more political exposure and in cities with low marketization levels and economic conditions. The results are robust to alternative specifications.

Chapter 2 titled "Foreign Institutional Investors and controlling shareholders' tunneling: Evidence from China," examines the effects of foreign institutional investors (FIIs) on controlling shareholders' tunneling, which has grown into a critical governance challenge of firms. I find that foreign institutional ownership decreases controlling shareholders' tunneling featuring various forms and concealment. I further address endogeneity using the instrumental variable method and change analysis, and the findings remain. I also identify one potential economic mechanism: FIIs could restrain tunneling by decreasing firms' earnings management. I further demonstrate the economic significance of FIIs' monitoring on tunneling by showing significant increases in firms' future performance. Also, the results are considerably pronounced among firms with (1) CEOs who are current or former members of NPC or CPPCC, (2) high accounting information quality, and (3) fewer analysts following. Overall, the results indicate that FIIs are effective monitors on controlling shareholders' misbehavior compared with domestic institutions.

These two essays contribute to the literature in several ways. My findings are among the first to focus on the impact of political uncertainty and A-H premium. The results also add to the new factors of A-H premium by showing the significant influence of political uncertainty. Moreover, this thesis provides new insights into the monitoring effects of foreign institutional investors in suppressing controllers' tunneling and the impacts work for different forms of tunneling activities. This finding also extends the research of the determinants of firms' tunneling problems. This evidence is also applicable to other emerging countries undergoing stock market reforms.