Working Paper: NBER ID: w24458
Authors: Jianan Liu; Robert F. Stambaugh; Yu Yuan
Abstract: We construct size and value factors in China. The size factor excludes the smallest 30% of firms, which are companies valued significantly as potential shells in reverse mergers that circumvent tight IPO constraints. The value factor is based on the earnings-price ratio, which subsumes the book-to-market ratio in capturing all Chinese value effects. Our three-factor model strongly dominates a model formed by just replicating the Fama and French (1993) procedure in China. Unlike that model, which leaves a 17% annual alpha on the earnings- price factor, our model explains most reported Chinese anomalies, including profitability and volatility anomalies.
Keywords: No keywords provided
JEL Codes: G12; G15; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| excluding small firms (L25) | clearer picture of size effect (L25) |
| size factor (P23) | expected returns (G17) |
| value effect (D46) | expected returns (G17) |
| EP ratio (C59) | value effect (D46) |
| CH3 model (C59) | performance improvement over FF3 (L15) |
| size and value factors (D46) | explained return variance (C29) |
| controlling for shell value contamination (Q35) | performance improvement (L15) |