The role of capital expansion in stock evaluation: A variance decomposition approach

Huixuan Li, Jing Chen, Manling Zhang and Ya Tang

Journal of Economic Dynamics and Control, 2025, vol. 177, issue C

Abstract: We extend Cohen et al.'s (2003) variance decomposition framework to examine cross-sectional stock valuation drivers across Chinese and U.S. markets by incorporating expected capital expansion as an additional component. Our analysis demonstrates that in China's A-share market, 32.8 percent of cross-sectional valuation dispersion is attributable to future capital expansion. This positive relationship is mirrored in the NASDAQ market but contrasts with the negative effect observed in the NYSE/AMEX market. In particular, capital expansion exhibits strong explanatory power for valuations of small firms, high-tech companies, and firms listed on China's growth-oriented ChiNext and STAR market segments. Our decomposition approach also measures price informativeness—the degree to which stock valuations reflect future cash flows. We find a significant improvement in the price informativeness of China's stock prices since 2005. These findings enhance our understanding of stock pricing dynamics in growth-oriented markets.

Keywords: Variance decomposition; Capital expansion; Pricing informativeness (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:177:y:2025:i:c:s016518892500079x

DOI: 10.1016/j.jedc.2025.105113

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