Size and Value in China
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.
We are grateful for comments from the referee (Eugene Fama), Jules van Binsbergen, Danting Chang, Zhi Da, Zhe Geng, Dong Lou, Amir Yaron, Jianfeng Yu, seminar participants at the Wharton School, and conference participants at the 2018 Johns Hopkins Carey Finance Conference. Yuan gratefully acknowledges financial support from the NSF of China (71522012). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Jianan Liu & Robert F. Stambaugh & Yu Yuan, 2019. "Size and Value in China," Journal of Financial Economics, . citation courtesy of