The price behavior of China-related stocks listed in China and Hong Kong

This paper examines the relationship between stock prices, earnings, and book values (i.e.,the value-relevance of earnings and book values) for China-originated stocks under different corporate governance structure and accounting standards. There are four types of shares originating from China, namely, A-shares, B-shares, H-shares, and red-chips. Both A- and B-shares are traded on China's Shanghai Securities Exchange and Shenzhen Stock Exchange, while H-shares and red-chips are traded on the Stock Exchange of Hong Kong. With the exception of red-chip companies, which are incorporated in Hong Kong and own assets in both Hong Kong and China, all other share companies are incorporated in China ind own almost all their assets in China. With the exception of A-share companies, which can be owned and traded only by Chinese domestic investors, other shares can be owned and traded only by foreign investors. A-share companies are required to report financial statements based on the Chinese Accounting Standards (CAS), B-share companies use the International Accounting Standards (IAS), and both H-share and red-chip companies employ either the Hong Kong Accounting Standards (HKAS) or the IAS. While corporate governance in Hong Kong is based the common-law system, corporate governance in China is based on the code-law system. These different types of institutional settings normally would lead the general public and the investment community to expect that the relationship between stock prices, earnings, and book values should be in the follow order: red-chips first, followed by H-shares, then B-shares, and finally A-shares. Surprisingly, our findings indicate the opposite of these predictions. We provide some explanations for these contradictory results