Price limits hitting effect and cross-sectional stock returns: Evidence from China

Abstract

We propose a firm-level measurement which relates the strength of stocks affected by the upper or lower price limits in China. Stocks that frequently hit the upper limit generate substantially lower future stock returns. This effect is significant when we control common factors of asset pricing models. The negative relationship between price limits and expected returns is stronger among micro, growth, and state-owned firms, and is also stronger during bull markets. Moreover, we find this effect could be explained by behavioral mispricing such as overreacted trading.