Information asymmetry, east–west cultural differences, and divergence in investor reactions

• Published date: 01 September 2023
• Author: Seungho Lee,Thomas Walker,Aoran Zhang,Yunfei Zhao
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/eufm.12388

DOI: 10.1111/eufm.12388

ORIGINAL ARTICLE

Information asymmetry, east–west cultural

differences, and divergence in investor

reactions

Seungho Lee

1

|Thomas Walker

2

|Aoran Zhang

3

|Yunfei Zhao

4

1

Department of Accountancy, Finance and Real Estate, Business School, University of Aberdeen, Aberdeen,

Scotland, UK

2

Department of Finance, John Molson School of Business, Concordia University, Montreal, Quebec, Canada

3

Department of Finance, Risk, and Banking, Nottingham University Business School, University of Nottingham,

Nottingham, England, UK

4

Department of Finance, College of Business and Public Management, Wenzhou‐Kean University, Wenzhou,

Zhejiang Province, China

Correspondence

Seungho Lee, Department of Accountancy,

Finance and Real Estate, Business School,

University of Aberdeen, Edward Wright

Bldg, Dunbar St, Aberdeen, Scotland AB24

3QY, UK.

Email: Seungho.Lee@abdn.ac.uk

Yunfei Zhao, Department of Finance,

College of Business and Public

Management, Wenzhou‐Kean University,

88 Daxue Rd, Ouhai, Wenzhou, Zhejiang

Province, China.

Email: qq21569584@126.com

Abstract

This paper investigates the divergence in investor

behaviour between the United States and China

following the abolition of the Chinese presidential

term limit in 2018, which may, in part, have reflected

the heterogeneous opinions expressed in public

online media regarding this event. Compared with

Chinese investors, the sentiment among US investors

was considerably more pessimistic. Accordingly, we

find that Chinese companies listed in the United

Eur Financ Manag. 2023;29:1191–1217. wileyonlinelibrary.com/journal/eufm

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This is an open access article under the terms of the Creative Commons Attribution‐NonCommercial‐NoDerivs License, which permits

use and distribution in any medium, provided the original work is properly cited, the use is non‐commercial and no modifications or

adaptations are made.

© 2022 The Authors. European Financial Management published by John Wiley & Sons Ltd.

We are grateful to the editor, Dr. John A. Doukas, and an anonymous referee for their valuable comments. In addition,

we thank Sanjay Banerji, Denis Schweizer, Frederick Davis, Gady Jacoby, Hamed Khadivar, Lorne Switzer, Maher

Kooli, as well as participants of the 32nd Australasia Finance and Banking Conference (Sydney, Australia) and the 2020

Cross Country Perspectives in Finance (CCPF) Conference for helpful comments and suggestions. We are grateful to

Stephen and Naomi Miller for helpful comments and suggestions and to Kalima Vico for excellent research assistance.

This study was funded by Concordia's Office of the Vice President, Research & Graduate Studies (OVPRGS). A previous

version of this paper was entitled ‘Information Asymmetry, Cultural Difference, and Divergence in Investor Reactions:

Empirical Evidence from the Chinese and U.S. Stock Markets’. Consistent with EFM guidelines, authors are listed in

alphabetical order.

States significantly underperformed relative to a

sample of propensity score‐matched firms listed in

China. Additionally, we find that the political

connectedness of firms to the Chinese government

strongly influenced the stock prices of US‐listed

Chinese firms.

KEYWORDS

China, equity market, political connections, presidential term

limit abolition, United States

JEL CLASSIFICATION

G14, G15, G18

1|INTRODUCTION

Because social media sites give us information that tends to confirm our view of the world—

what Pariser calls ‘an endless you‐loop’—people live in increasingly narrow content silos and

correspondingly smaller walled gardens of thought.

̶Michiko Kakutani, The Death of Truth: Notes on Falsehood in the Age of Trump

Over the last decade, online media and social network services (SNS) have emerged as the

primary channels of information distribution, rapidly replacing traditional news sources.

According to a Pew Research Center (2021) survey, the proportion of Americans who obtain

news from social media platforms has been increasing for a number of years, and in 2019, 55%

of Americans ‘often’or ‘sometimes’obtained their news from social media. It is undeniable that

this change has contributed to the efficiency of financial markets by allowing information‐

sharing to become faster and more targeted. However, there may also be disadvantages, as the

use of social media as a news source can cause bias and information distortion when users

over‐rely on these sources (Shearer & Grieco, 2019). According to Qin et al. (2017), because of

the application of customized algorithms, social media tends to tailor news feeds to each

individual service user and ‘locks’individuals in a loop that aligns with and reinforces their

views. The use of SNS as a source of news is also a common trend in China (Xiao &

Chen, 2020). Microblogging in SNS, through Weibo for example, allows news and information

to be distributed at remarkable speed and with great efficiency, albeit with disadvantages

similar to those described above.

1

Therefore, views on key political events tend to differ among Chinese and US citizens, not

only due to patriotism but also as a result of the information asymmetry that arises from

differing media coverage of such events. Given that the social and political environment of

1

We acknowledge the potential bias among media posts due to media censorship. Nonetheless, prior literature shows that the

performance of publicly listed firms has indeed followed media sentiments (see, e.g., Piotroski et al., 2015,2017;Wu&

Tian, 2021).

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