Illiquidity Discount and Flight to Liquidity Premium in China Stock Prices

This paper provides evidence on the illiquidity discount and flight to liquidity premium in China share prices through the data of illiquid stock private transfer. On the average, the illiquidity price discounts prior to June 12th 2001 is 85.68% and past June 12th 2001, the same figure is 77.07%. The illiquidity premium in China preponderates over two times of the most in international similar studies. There are flight to liquidity premium equal to 8.61% of the counterpart liquid A-share price from the liquid share to illiquid stock resulted from the flight to system boosting up the liquidity of the illiquid stock, which can be interpreted by the institution change factor in the regression analysis. The factors of psychological scare and lost confidence of the investors are important reason resulted in flight to liquidity. Although the "stipulation of deducing share holding" (June 12th 2001) being abolished, the expectation of the existing illiquid stock exchanged partly or wholly in the secondary market isn't still removed from the market participants as that not having been abolished. Before June 12th 2001, the illiquidity discount has a significantly negative correlation with the fixed assets depreciation and a significantly positive correlation with the return on assets. After June 12th 2001, the illiquidity discount has significantly positive correlation with the intangible assets amortization, the income taxes, and the working cash flow per share and a significantly negative correlation with the major business income. Between June 12th 1999 and June 11th 2003, the illiquidity discount has a significantly positive correlation with the return on equity, a significantly negative correlation with the fixed assets, and a significantly positive correlation with the flight to system. During the period of the study sample, the illiquidity discount has a significantly positive correlation with the average A-stock close price of the final 5 days in the fiscal year trading illiquid stocks, a significantly negative correlation with the net assets per share, and a significantly negatives correlation with the month age since IPO. The illiquid shares in the corporations with lower average A-stock close price of the final 5 days in the fiscal year trading illiquid stocks, more net assets per share, and longer month age since IPO are favored more by the investors of illiquid stock, and these preferences of illiquid stock investors are intensified after June 12th 2001