The real value of China's stock market

What capital allocation role can China's stock market play? Counter to perception, stock prices in China have become as informative about future profits as they are in the US. This rise in stock price informativeness has coincided with an increase in investment efficiency among privately owned firms, suggesting the market is aggregating information and providing useful signals to managers. However, price informativeness and investment efficiency for state-owned enterprises fell below that of privately owned firms after the postcrisis stimulus, perhaps reflecting unpredictable subsidies and state-directed investment policy. Finally, evidence from realized returns suggests Chinese firms face a higher cost of equity capital than US firms. (C) 2020 Elsevier B.V. All rights reserved.

Automated summary

China's stock market has become as informative about future profits as the US market, suggesting it can provide useful signals to managers. However, state-owned enterprises in China have lower price informativeness and investment efficiency compared to privately owned firms, which may be due to unpredictable subsidies and state-directed investment policy. Evidence also indicates that Chinese firms face a higher cost of equity capital than US firms.