Media coverage and foreign share discount puzzle in China

Abstract

There is growing evidence in the finance literature that media coverage can influence security pricing by facilitating news dissemination and reducing informational frictions even if it does not provide new information. This study examines the role of media coverage in the well-known foreign share discount puzzle in China. We show that differential level of news coverage for the same firm by Chinese and English media is significantly associated with the foreign share discount. Specifically, the discount is greater among firms with relatively more Chinese than English press coverage. We also find this effect more pronounced among firms with less analyst following and less institutional ownership. This implies that media coverage compensates for limitations in analyst coverage and is more influential among less sophisticated investors. Our evidence is robust to controls of other determinants of Chinese foreign share discount documented by previous literature. Despite the widespread belief that the Chinese media is tightly controlled, our study reveals that it still plays an influential role in the capital market.