TAILIEUCHUNG - Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia *

We value stock options based on the Black-Scholes (1973) formula for valuing European call options, as modified by Merton (1973). 5 To construct a measure of the total stock option holdings of each CEO at a given point in time, we use proxy data on stock option grants, gains from exercising stock options, and the total number of stock options held by the CEO. Annual proxies contain information on options granted during the preceding fiscal year, including the number, duration, and exercise price of the options. In order to construct a CEO’s total holdings of stock options, we go back to the first year in. | ANNALS OF ECONOMICS AND FINANCE 10-2 225-255 2009 Speculative Trading and Stock Prices Evidence from Chinese A-B Share Premia Jianping Mei Cheung Kong Graduate School of Business Jose A. Scheinkman Department of Economics Princeton University Princeton NJ 08540 USA and Wei Xiong Department of Economics Princeton University Princeton NJ 08540 USA E-mail wxiong@ The market dynamics of technology stocks in the late 1990s have stimulated a growing body of theory that analyzes the joint effects of short-sales constraints and heterogeneous beliefs on stock prices and trading volume. This paper examines several implications of these theories using a unique data sample from a market with stringent short-sales constraints and perfectly segmented dual-class shares. The identical rights of the dual-class shares allow us to control for stock fundamentals. We find that trading caused by investors speculative motives can help explain a significant fraction of the price difference between the dual-class shares. Key Words Speculative bubble Trading volume. JEL Classification Numbers G12 G15. Mei is at Cheung Kong Graduate School of Business. Scheinkman and Xiong are at Princeton University and affiliated with the National Bureau of Economic Research. We thank Yakov Amihud Cheol Eun Zhiwu Chen Ed Glaeser Galina Hale Arvind Krish-namurthy Owen Lamont Lin Peng and seminar participants at IMF NYU Princeton 2005 AFA meetings and 2005 NBER Summer Institute for valuable comments and suggestions. We are grateful to Chunhui Miao and Aureo de Paula for able research assistance and to Ming Cai Kent Hargis Shenzhen GTA Information Technology Inc. and Boshi Fund Management Company for providing us with the Chinese market data. Scheinkman thanks the National Science Foundation and the Blaise Pascal Research Chair for research support. Address correspondence to Wei Xiong by mail at Department of Economics Princeton University Princeton NJ 08540 USA or by email at .

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