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Disentangling Liquidity and Size Effects in Stock Returns: Evidence from China

41 Pages Posted: 20 Jul 2006  

Rong Cui

University of Vienna - School of Business, Economics and Statistics - Department of Finance

Youchang Wu

University of Oregon - Lundquist College of Business

Date Written: February 2007

Abstract

Both size effect and liquidity effect in stock returns have been documented extensively in the literature. Since firm size and stock liquidity are closely correlated, it is generally difficult to disentangle these two effects. The Chinese stock market offers a unique opportunity to address this issue due to the widespread coexistence of tradable and nontradable shares in listed companies. We find that the size effect of nontradable shares on expected returns persists after controlling for several common liquidity measures as well as the size of tradable shares. However, it is substantially weaker than the size effect of tradable shares. Our results suggest that the negative relation between stock returns and firm size, as normally measured by the size of tradable shares, is a mixture of a genuine size effect and a liquidity effect. We also find that despite many special features of the market environment, Chinese stock returns exhibit cross-sectional patterns strikingly similar to those documented for developed markets.

Keywords: liquidity, size effect, stock returns, Chinese stock market

JEL Classification: G12, G14, G15

Suggested Citation

Cui, Rong and Wu, Youchang, Disentangling Liquidity and Size Effects in Stock Returns: Evidence from China (February 2007). Available at SSRN: https://ssrn.com/abstract=910248 or http://dx.doi.org/10.2139/ssrn.910248

Rong Cui

University of Vienna - School of Business, Economics and Statistics - Department of Finance ( email )

Bruennerstrasse 72
Vienna, 1210
Austria

Youchang Wu (Contact Author)

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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