The Missing Profitability Premium in China's A-Shares: Explanations Based on Profitability Predictability and Market Frictions

42 Pages Posted: 16 Feb 2018

See all articles by Bin Cai

Bin Cai

Jiangxi University of Finance and Economics

Ali M. Kutan

Southern Illinois University at Edwardsville

Jun Xiao

Jiangxi University of Finance and Economics

Ping-Wen Sun

Minjiang University - Newhuadu Business School

Date Written: December 8, 2017

Abstract

We find profitability measures fail to explain future stock returns of China’s A-shares. In addition, although profitability growth significantly and positively correlates with the cumulative stock return in the following year, profitability measures do not predict profitability growth, suggesting the lack of profitability sustainability helps explain the missing profitability premium. Furthermore, we also find that firms with higher profitability have lower stock price delay, are more liquid, and attract more investor attention. Because we find that investors require a premium for holding stocks with higher market frictions and that profitability measures significantly and negatively predict the component of future stock returns explained by market frictions, our results suggest that the required premium for holding stocks with market frictions may conceal the potential profitability premium. Overall, our results suggest both the unsustainable profitability and lower price delay premium of firms with higher profitability are responsible for the missing profitability premium for China’s A-shares. The policy implications of the findings are discussed.

Keywords: profitability, market frictions, price delay, stock returns, A-shares

JEL Classification: G11, G12, G14

Suggested Citation

Cai, Bin and Kutan, Ali M. and Xiao, Jun and Sun, Ping-Wen, The Missing Profitability Premium in China's A-Shares: Explanations Based on Profitability Predictability and Market Frictions (December 8, 2017). Available at SSRN: https://ssrn.com/abstract=3118183 or http://dx.doi.org/10.2139/ssrn.3118183

Bin Cai

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Ali M. Kutan

Southern Illinois University at Edwardsville ( email )

Department of Economics and Finance AH-3141
Edwardsville, IL 62026-1102
United States
618-650-3473 (Phone)
618-650-3047 (Fax)

HOME PAGE: http://https://ideas.repec.org/e/pku30.html

Jun Xiao

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Ping-Wen Sun (Contact Author)

Minjiang University - Newhuadu Business School ( email )

Fujian
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
48
Abstract Views
366
PlumX Metrics