Decomposing the Value Premium: The Role of Intangible Information in the Chinese Stock Market
Posted: 19 Jun 2017 Last revised: 3 Jun 2020
Date Written: May 18, 2020
Compared with other developed stock markets, the Chinese stock market has a unique informational and trading environment. Given this unique environment, we find that intangible information (which is orthogonal to past accounting information) and arbitrage risk are potential sources of the value premium. In particular, our single and multivariate decomposition analyses suggest that intangible information directly contributes at least 40% to the value premium over a one-year investment horizon. Further, idiosyncratic volatility, a proxy for arbitrage risk, also influences the value premium. However, its contribution becomes insignificant once we account for the impact of intangible information on idiosyncratic volatility. Overall, our findings indicate that intangible information, which is unrelated to the firm’s “fundamental” accounting-based performance measures, is the key driver of the value effects in the Chinese stock market.
Keywords: Chinese stock market; value premium; intangible information; arbitrage risk
JEL Classification: G12, G15, M41
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