The value premium puzzle, behavior versus risk: New evidence from China

Ephraim Clark and Zhuo Qiao

The Quarterly Review of Economics and Finance, 2020, vol. 76, issue C, 12-21

Abstract: This paper investigates the value premium puzzle in the Chinese stock market. After establishing that the value premium does exist in the Chinese stock market, it uses an innovative technique based on stochastic dominance theory to test the behavior based versus risk based explanations for the puzzle. We find no evidence of a systematic behavioral factor, such as over/under-reaction, that is driving this premium. This finding is robust with respect to negative and positive return regimes. We do, however, find strong evidence that the value premium reflects compensation for bearing more risk associated with financial inflexibility.

Keywords: Value premium puzzle; Risk; Financial inflexibility; Stochastic dominance (search for similar items in EconPapers)
JEL-codes: C14 G11 G12 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:76:y:2020:i:c:p:12-21

DOI: 10.1016/j.qref.2019.04.007

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