The Real Value of China's Stock Market

41 Pages Posted: 14 Nov 2014

See all articles by Jennifer N. Carpenter

Jennifer N. Carpenter

New York University (NYU) - Department of Finance

Fangzhou Lu

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: November 11, 2014

Abstract

China is the world's largest investor and greatest contributor to global economic growth by wide margins. The efficiency of its financial system in allocating capital to investment will be important to sustain this growth. This paper shows that China's stock market has a crucial role to play. Since the reforms of the last decade, China's stock market has become as informative about future corporate profits as in the US. Moreover, though it is a closed market, Chinese investors price risk and other stock characteristics remarkably like investors in other large economies. They pay up for large stocks, growth stocks, and long shots, and they discount for illiquidity and market risk. China's stock market no longer deserves its reputation as a casino. In addition, the trend of stock price informativeness over the last two decades is highly correlated with that of corporate investment efficiency. China's stock market appears to be aggregating diffuse information and generating useful signals for managers. Finally, because of its low correlation with other stock markets and high average returns, China's stock market offers high alpha to diversified global investors who can access it. Yet this high alpha amounts to an inflated cost of equity capital, constraining the investment of China's smaller, more profitable enterprises. Further reforms that open this market to global investors and improve stock price informativeness will be important to increase China's investment efficiency and fuel its continued economic growth.

Keywords: financial system development, economic growth, market segmentation, cross-sectional pricing, shadow banking

JEL Classification: E44, G12, G15, G18, O16, O53, P20, P34

Suggested Citation

Carpenter, Jennifer N. and Lu, Fangzhou and Whitelaw, Robert F., The Real Value of China's Stock Market (November 11, 2014). Available at SSRN: https://ssrn.com/abstract=2519886 or http://dx.doi.org/10.2139/ssrn.2519886

Jennifer N. Carpenter (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0352 (Phone)
212-995-4233 (Fax)

Fangzhou Lu

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Robert F. Whitelaw

New York University ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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