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Abstract
Unlike any other experience in international financial markets, Chinese investors consistently pay more for shares of Chinese stocks than do foreign investors. Some researchers have attributed this premium to economic principles such as substitutability. This paper analyzes how the premium has been affected by the regulatory change of 2001 which allowed Chinese investors to purchase B-share stocks. We find that the size of the premium decreased following the regulatory change and that the premium is responding differently to various economic factors. Results further suggest the premium may be explained in part by economic principles and the rational behavior of investors.