Why Firms in Concentrated Industries are Overpriced in China?

Guosheng He, Jiang Hu, Yugang Yin and Yahui Liu

Emerging Markets Finance and Trade, 2023, vol. 59, issue 3, 818-835

Abstract: Firms in concentrated industries (FCIs) might not be as valuable as they priced. Using a product-based monopoly measure for individual firms, we find that FCIs are prone to being overpriced in China stock market. This overpricing cannot be dismissed by varying proxies for arbitrage constraints and risks. Alternatively, it can be attributed to immoderate optimism on FCIs. In line with the optimism explanation, we find that FCIs suffer more serious fundamental declines in high economic policy uncertainty periods and that, the overpricing is corrected during earning announcements. These findings are robust across alternative model specifications and variable constructions.

Date: 2023
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DOI: 10.1080/1540496X.2022.2108316

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