Decomposing the Value Premium: The Role of Intangible Information in the Chinese Stock Market
Posted: 19 Jun 2017 Last revised: 20 Jun 2017
Date Written: June 15, 2017
This paper examines two potential sources of value premium – arbitrage risk and intangible information (INTANINFO) – in the Chinese stock market, which has a unique informational and trading environment different from other developed stock markets. By decomposing the value premium according to these sources, we find that arbitrage risk, which is measured by idiosyncratic volatility (IVOL), and INTANINFO contribute significantly to the existence of the value premium over various investment horizons. Furthermore, our single and multiple decomposition analyses suggest that INTANINFO influences the value premium through two channels. The first channel is the direct impact of INTANINFO, which contributes at least 40% to the value premium over a 12-month investment horizon. In addition, INTANINFO also affects the value premium through the indirect channel of IVOL. Once we account for the impact of INTANINFO on IVOL, IVOL does not significantly influence the value premium, further suggesting that arbitrage risk plays a less important role compared with INTANINFO. We also show that the likely sources of INTANINFO are related to future operating performance. Overall, our findings indicate that INTANINFO (which is orthogonal to past accounting information) is the key driver of the value premium in the Chinese stock market. We discuss the implications of our findings.
Keywords: value premium, intangible information, idiosyncratic volatility, Chinese stock market
JEL Classification: G12, G15, M41
Suggested Citation: Suggested Citation