Dissecting the Long-term Performance of the Chinese Stock Market

61 Pages Posted: 5 Dec 2016 Last revised: 21 Oct 2019

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Jun Qian

Fanhai International School of Finance, Fudan University; University of Pennsylvania - Wharton Financial Institutions Center

Chenyu Shan

Shanghai University of Finance and Economics

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University

Date Written: October 18, 2019

Abstract

The Chinese economy, the largest in the world in PPP terms, has been the fastest growing for the past forty years among large economies. The Chinese stock market, established in 1990, is the second largest in the world in terms of market capitalization. Stock market returns have been unrelated to future growth rates of the economy. During the period 2000-2017, stock returns of domestically listed Chinese firms are lower than that of listed firms from large developed and emerging countries, as well as externally listed Chinese firms. The performance gap, as measured by net cash flows, between domestically listed firms and externally listed and matched unlisted Chinese firms, is greater than the gap between the state-owned and privately-owned Chinese firms. We argue that differences in institutional features can explain this performance disparity of the Chinese domestic market. Problematic IPO and delisting processes lead to adverse selection of firms entering and staying in the market. With higher levels of investment compared to listed firms from the US, Japan, India, Brazil and externally listed firms, China’s domestically listed firms generate lower net cash flows, implying low investment efficiency. Lower net cash flows are associated with more related-party transactions. Both of these observations indicate deficiencies in corporate governance. A model of the prospect of corporate governance reforms can generate predictions on stock returns consistent with our empirical findings. They are also consistent with behavioral theories of stock returns.

Keywords: Stock market, return, IPO, investment, cash flow, related party transaction

JEL Classification: G12, G15, G3

Suggested Citation

Allen, Franklin and Qian, Jun and Shan, Chenyu and Zhu, Julie, Dissecting the Long-term Performance of the Chinese Stock Market (October 18, 2019). Available at SSRN: https://ssrn.com/abstract=2880021 or http://dx.doi.org/10.2139/ssrn.2880021

Franklin Allen

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Jun Qian

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States

HOME PAGE: http://fic.wharton.upenn.edu/fic/

Chenyu Shan (Contact Author)

Shanghai University of Finance and Economics ( email )

100 Wudong Road
Shanghai
China

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University ( email )

220 Handan Road
Shanghai, 200433
China

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