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Money and politics : a study of red-chip stocks in Hong Kong

Authors Butcher, Alva
Huo, Paul Y.
Wei, John K.C.
Issue Date 1999-07
Source Presented at the 6th annual conference of multinational finance society, Toronto, Canada on July 7-10, 1999 and European Financial Management Association meetings on June 1999
Summary Red-chip stocks are defined as the stocks of companies which are incorporated and listed in Hong Kong but are controlled by Chinese entities or have Chinese state-owned enterprises as their parent companies. These firms have been widely viewed as a major experimental tool in China's economic reform. In this paper we analyze the market performance of red-chip stocks in the first year following Hong Kong's reversion to China. A 'power index' is used as a proxy measure of the relative political clout derived from the special guanxi of each red-chip firm. We find that, during the year-long market downturn triggered by the Asian crisis, the power index indeed moderated the loss of each stock's market capitalization as a percentage of its peak value, and also lowered the negative impact on the mean daily return. However, the impact of political clout does not seem to be as prominent as that implied by the high appreciation of red chip stocks during the six months prior to the reversion of Hong Kong to China.
Language English
Format Conference paper
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