Abstract
This study provides novel insights into the stock return predictability related to the firm-level total factor productivity (TFP) in the China's stock market, covering the period from 1999 to 2020. Contrary to studies on other countries, our research identifies a positive correlation between the productivity of Chinese firms and their future stock returns. We suggest that this correlation is driven by mispricing rather than risk premium. Specifically, we argue that investors' difficulties in accurately assessing firm-level productivity and limited attention result in the inadequate incorporation of this information into stock prices. Furthermore, our analysis explores additional factors contributing to the observed productivity-related market anomaly, including investor overconfidence, positive feedback trading, lottery preference, information uncertainty, and limits to arbitrage, indicating investors' irrationality and behavioral biases. Importantly, our study also demonstrates that firm-level productivity serves as a reliable predictor of a firm's future profitability.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
