Misvaluation comovement,market efficiency and the cross-section of stock returns: Evidence from China |
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| Affiliation: | 1. School of Management, Fudan University, Shanghai, PR China;2. Faculty of Business Administration, University of Macau, Avenida da Universidade, Taipa, Macau;3. College of Business and Economics, Australian National University, Australia;1. Università di Torino, Departimento di Economia “Cognetti de Martiis”, Lungo Dora Siena 100A, 10153 Turin, Italy;2. Collegio Carlo Alberto, BRICK, via Real Collegio 30, 10024 Moncalieri, Turin, Italy;1. Sun Yat-sen Business School, Sun Yat-sen University, Guangzhou 510275, PR China;2. College of Management and Economics, Tianjin University, Tianjin 300072, PR China;3. China Center for Social Computing and Analytics, Tianjin University, Tianjin 300072, PR China;4. UTS Business School, University of Technology, Sydney, PO Box 123, Broadway, Ultimo 2007, NSW, Australia;1. School of Public Economics & Administration, Shanghai University of Finance and Economics, Shanghai 200433, China;2. The World Bank, 1818 H Street NW, Washington, DC 20433, United States;1. School of Banking and Finance, University of International Business and Economics, Beijing 100029, People''s Republic of China;2. Mailman School of Public Health, Columbia University, New York 10032, United States;3. UQ Business School, University of Queensland, Brisbane QLD 4072, Australia |
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| Abstract: | In this study, we examine the relation between stock misvaluation and expected returns in China's A-share market. We measure individual stocks’ misvaluation based on their pricing deviation from fundamental values, following Rhodes-Kropf et al. (2005. J. Finan. Econ. 77 (3), 561) and Chang et al. (2013. J. Bank. Finance, forthcoming), and find that the measure has strong and robust return predictive power in the Chinese market. We further form a misvaluation factor and find that misvaluation comovement and systematic misvaluation exist in the Chinese market. A comparison of our results with those of Chang et al. (2013. J. Bank. Finance, forthcoming) reveals that the misvaluation effect is much stronger in the Chinese market than in the U.S market. This evidence is consistent with the notion that the Chinese market is much less efficient than the U.S. market. Finally, we show that the return predictive power of misvaluation has weakened since China launched its split-share structure reform in 2005, which could result from the fact that the reform helps to promote market efficiency. |
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| Keywords: | Stock misvaluation Market efficiency Chinese stock market Comovement Stock returns |
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