Non-Tradable Share Reform, Liquidity and Stock Returns in China
50 Pages Posted: 18 Dec 2014
Date Written: November 16, 2014
This paper studies the influence of the non-tradable share reform in the cross-section of stock returns in China. Prior research has generally neglected this important development in the Chinese stock market. We find that the firm-specific illiquidity measures that reflect direct transaction costs, price impact and difficulties in trading immediacy, exhibit a positive and significant relationship with stock returns. These effects are particularly pronounced after the non-tradable share reform. Furthermore, in the post-reform era portfolios with high illiquidity (i.e. high relative bid-ask spread, high Amihud illiquidity, low Amivest liquidity ratio) significantly outperform portfolios with low illiquidity, controlling for size and book-to-market effects.
Keywords: Non-tradable share reform, Liquidity, Stock returns, Chinese stock markets
JEL Classification: G12, G14
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