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

Jianping Mei

Jose A. Scheinkman

and

Wei Xiong

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.