Firm-level productivity and stock return: New evidence from China

Ning Tang, Mengyao Gao, Yixun Zhou, Fangzhao Zhou and Jichen Zhu

International Review of Economics & Finance, 2024, vol. 96, issue PA

Abstract: This study provides novel insights into the stock return predictability related to the firm-level total factor productivity (TFP) in the China's stock market, covering the period from 1999 to 2020. Contrary to studies on other countries, our research identifies a positive correlation between the productivity of Chinese firms and their future stock returns. We suggest that this correlation is driven by mispricing rather than risk premium. Specifically, we argue that investors' difficulties in accurately assessing firm-level productivity and limited attention result in the inadequate incorporation of this information into stock prices. Furthermore, our analysis explores additional factors contributing to the observed productivity-related market anomaly, including investor overconfidence, positive feedback trading, lottery preference, information uncertainty, and limits to arbitrage, indicating investors' irrationality and behavioral biases. Importantly, our study also demonstrates that firm-level productivity serves as a reliable predictor of a firm's future profitability.

Keywords: Firm-level productivity; Stock return predictability; Market anomaly; Mispricing (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G40 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:96:y:2024:i:pa:s1059056024005495

DOI: 10.1016/j.iref.2024.103557

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