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Q-theory, mispricing, and profitability premium: Evidence from China

Fuwei Jiang (), Xinlin Qi and Guohao Tang

Journal of Banking & Finance, 2018, vol. 87, issue C, 135-149

Abstract: Using various empirical measures, we find that, in China, firms with high profitability generate substantially higher future stock returns than those with low profitability. This positive effect of profitability on expected returns is robust to controlling for other firm characteristics and risks. We show that the profitability premium is stronger among firms with low investment friction, which is consistent with the implications of investment-based q-theory asset pricing models. However, the premium is not stronger among firms with high limits to arbitrage, contradicting behavioral mispricing explanations.

Keywords: Profitability premium; Chinese stock market; Investment frictions; Q-theory; Mispricing (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2018
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