Investor Sentiment, Idiosyncratic Risk, and Stock Price Premium: Evidence From Chinese Cross-Listed Companies

Abstract

We investigate whether idiosyncratic risk and investor sentiment play important roles in the price disparity between China A-shares and H-shares. To build the investor sentiment indices and decompose them into different fragments for both markets, we use both principal component analysis (PCA) and partial least squares (PLS) approaches. We further look at how idiosyncratic risk affects stock mispricing and how it deals with investor sentiment. We find that the price premium of A-shares over H-shares is strongly linked to the sentiment differential. We also discover that idiosyncratic risk has a major effect on the price premium of cross-listed companies. Moreover, a larger sentiment differential reinforces the impact of idiosyncratic risk on the price disparity. The above results remain robust after controlling for other economic factors.