The Real Value of China's Stock Market
41 Pages Posted: 22 Jan 2018 Last revised: 1 Feb 2018
Date Written: January 19, 2018
This paper shows that, counter to common perception, stock prices in China are strongly linked to firm fundamentals. Since the reforms of the early 2000s, stock prices are as informative about future profits as they are in the US. Although the market is segmented from international equity markets, Chinese investors price individual stock characteristics like other global investors: they pay up for size, growth, liquidity, and long shots, while they discount for systematic risk. Price informativeness is significantly correlated with corporate investment efficiency. For international investors, China's stock market offers high average returns and low correlation with other equity markets.
Keywords: capital allocation, price informativeness, market integration, global investing
JEL Classification: E44, F30, G12, G14, G15, O16, O53, P21, P34
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