This thesis studies the trading of the Chinese American Depositories Receipts (ADRs) and their respective underlying H shares issued in Hong Kong. The primary intention of this work is to investigate the arbitrage opportunity between the Chinese ADRs and their underlying H shares. This intention is motivated by the market observation that hedge funds are often in the top 10 shareholders of these Chinese ADRs. We start our study from the origin place of the Chinese ADRs, China’s stock market. We pay particular attention to the ownership structure of the Chinese listed firms, because part of the Chinese ADRs also listed A shares (exclusively owned by the Chinese citizens) in Shanghai. We also pay attention to the market microstructures and trading costs of the three China-related stock exchanges. We then proceed to empirical study on the Chinese ADRs arbitrage possibility by comparing the return distribution of two securities; we find these two securities are different in their return distributions, and which is due to the inequality in the higher moments, such as skewness, and kurtosis. Based on the law of one price and the weak-form efficient markets, the prices of identical securities that are traded in different markets should be similar, as any deviation in their prices will be arbitraged away. Given the intrinsic property of the ADRs that a convenient transferable mechanism exists between the ADRs and their underlying shares which makes arbitrage easy; the different return distributions of the ADRs and the underlying shares address the question that if arbitrage is costly that the equilibrium price of the security achieved in each market is affected mainly by its local market where the Chinese ADRs/the underlying Hong Kong shares are traded, such as the demand for and the supply of the stock in each market, the different market microstructures and market mechanisms which produce different trading costs in each market, and different noise trading arose from asymmetric information across multi-markets. And because of these trading costs, noise trading risk, and liquidity risk, the arbitrage opportunity between the two markets would not be exploited promptly. This concern then leads to the second intention of this work that how noise trading and trading cost comes into playing the role of determining asset prices, which makes us to empirically investigate the comovement effect, as well as liquidity risk. With regards to these issues, we progress into two strands, firstly, we test the relationship between the price differentials of the Chinese ADRs and the market return of the US and Hong Kong market. This test is to examine the comovement effect which is caused by asynchronous noise trading. We find the US market impact dominant over Hong Kong market impact, though both markets display significant impact on the ADRs’ price differentials. Secondly, we analyze the liquidity effect on the Chinese ADRs and their underlying Hong Kong shares by using two proxies to measure illiquidity cost and liquidity risk. We find significant positive relation between return and trading volume which is used to capture liquidity risk. This finding leads to a deeper study on the relationship between trading volume and return volatility from market microstructure perspective. In order to verify a proper model to describe return volatility, we carry out test to examine the heteroscedasticity condition, and proceed to use two asymmetric GARCH models to capture leverage effect. We find the Chinese ADRs and their underlying Hong Kong shares have different patterns in the leverage effect as modeled by these two asymmetric GARCH models, and this finding from another angle explains why these two securities are unequal in the higher moments of their return distribution. We then test two opposite hypotheses about volume-volatility relation. The Mixture of Distributions Hypothesis suggests a positive relation between contemporaneous volume and volatility, while the Sequential Information Arrival Hypothesis indicates a causality relationship between lead-lag volume and volatility. We find supportive evidence for the Sequential Information Arrival Hypothesis but not for the Mixture of Distributions Hypothesis.

This paper addresses the problem of a failing net debt approach; deposited funds rarely compensate the cost of debt. Venturing into operational credit facilities, the study evaluates the efficiency and feasibility of transitioning into fully cash-free liquidity management. The study takes a holistic approach and evaluates the research questions from the perspective of management through case studies on four smaller Swedish industrial firms. The study finds that there is substantial potential to free up capital; return on equity could have been boosted by an annual 5-10 percent including substantial one-off distributions. The study also concludes that Agency reasons are strong reasons for why firms are carrying material cash reserves. Through qualitative interviews, the study identifies several additional, but not less important, obstacles in the way of a full out cash-free transition. Most significantly, the financial system is not offering fully committed long term operational credit facilities and operating across different jurisdictions complicates the consolidation of liquidity. The study concludes that the matter would not have vast negative implications on real business activities, although further research would be required in regard to an extended debt overhang problem. / Uppsatsen kretsar kring den fallerande logiken med begreppet nettoskuld; tillgodohavanden på bank genererar sällan upp för kostnaden relaterad till motsvarande skuld. Med utgångspunkt i operationella kreditstrukturer utvärderas möjliga effektivitetsvinster och genomförbarheten av en fullständig övergång till kassa-fri likviditetshantering. Studien har ett holistiskt angreppssätt och utvärderar frågeställningarna från ett management-perspektiv genom fallstudier på fyra mindre svenska industriella bolag. Studien finner betydande möjligheter att frigöra kapital; årliga avkastningen på eget kapital hade kunnat öka med 5–10 procent och betydande engångsutdelningar hade varit möjliga. Studien finner vidare att agentteorin är en stark anledning till att bolag bär betydande kassapositioner. Genom kvalitativa intervjuer identifierar studien ytterligare, men ej desto mindre betydande, hinder för en kassa-fri övergång. Mest betydelsefullt, är att nuvarande finansiella system inte erbjuder för syftet fullgoda kreditstrukturer, samt det faktum att företag med verksamhet över olika jurisdiktioner upplever juridiska svårigheter med att konsolidera likviditet. Studien drar slutsatsen att en övergång inte skulle medföra betydande negativa konsekvenser för den operativa affärsverksamheten, men identifierar samtidigt att ytterligare studier skulle vara nödvändiga framförallt kring hur finansiella incitament kopplade till agent-teorins ’debt overhang’ skulle förändras vill en övergång till en fullt garanterad operationell kreditstruktur.