Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 134, Issue 1, Pages 48-69Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jfineco.2019.03.008
Keywords
China; Size; Value; Factors; Anomalies
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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. (C) 2019 The Authors. Published by Elsevier B.V.
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