Financial Education

Many have characterized Chinese stock markets as inefficient, casino-like and speculative. In the November 2007 Pacific Basin Finane Journal Eun and Huang show that China’s markets may be more rational than many credit.

China’s markets, more than others, are characterized by small investors with undiversified portfolios. Only 37% of shares are publicly tradable, and only 10% of listed companies can offer the B- or H- class shares available to foreign investors. In studying various preferences, the authors find the following:

1. Stocks are priced according to company-specific rather than systematic risk. There are strong size and value effects, similar to the results found in U.S. markets.
2. Investors will pay a premium for more liquid stocks.
3. Investors will pay a premium for dividend paying stocks, possibly because dividends may reduce the ability of managers to expropriate funds.
4. Investors require lower returns for A-share companies that also issue B- or H-shares, possibly because such companies must meet more stringent disclosure requirements.

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See also:

Estimating the Market Risk Premium Using Arbitrage Pricing Theory

The Capital Asset Pricing Model (CAPM)

Stock Migration

Where is the Value Premium?

Affect in a Behavioral Asset Pricing Model