Abstract：The positive return differential between high and low book-to-market stocks is the value effect, having been documented in many markets around the world. A great number of researches have shown that the market-to-book (MB) factor performs poorly in tests on China’s portfolios. The mechanism for why the MB effect is not significant in China needs a more detailed description, but further study in this area is deficient. As an emerging market, the volatility of China’s stock market is larger than that of developed countries. The high return volatility leads us to suspect that the market behavior of investors may interfere with the measurement of the MB effect. We decompose MB into market-to-value and value-to-book components by using the model introduced by Rhodes-Kropf, Robinson, and Viswanathan (2005). By analyzing the dynamic adjustment behavior between the value-to-book component and the convenience MB by using the partial adjustment model proposed by Flannery and Rangan (2006), we find that MB fluctuates up and down around the value-to-book component, and we define this finding as an anchor-twisting motion. After excluding the anchor-twisting component, we re-test the three-factor pricing model proposed by Fama and French by using the Chinese portfolio, and find that the MB effect changes from insignificant (t value=－1.202) to significant (t value=－3.561). The finding of our research provides a standard data preprocessing program for the follow-up research of Fama and French’s factor pricing test on China’s portfolios. The result of the partial adjustment model shows that MB’s adjustment speed is 0.85, which indicates that the typical firm completes more than half of its proper market capital adjustment in less than one year. The adjustment parameter is significant at the 99 confidence level, which suggests that the anchor-twisting motion is widespread in Chinese stock markets. Over the 1998 to 2017 period, a long-short portfolio strategy based on the conventional MB ratio produces an average return of －2.3% per year. The same strategy based on value-to-book produces an average return of 8.4%, whereas the market-to-value produces an average return of －10.3%. Our baseline results show that the entire value premium concentrates on the value-to-book component. The market behavioral component (market-to-value) interferes with the measurement of the conventional MB effect. The formal pricing tests show that the value-to-book component can explain the cross-section of returns. The parameter of the three-factor regression rises by 42 basis points from MB’s －0.017 (t=－1.202) to M*B’s －0.059 (t=－3.561), significant at 99% confidence level. We give a specific explanation for the source of the anchor-twisting motion. The M (market capital) and B (book value) have different information transmission efficiency. M’s information transmission efficiency is higher because the price is transmitted in real-time, while B’s information transmission efficiency is lower because the financial information is disclosed quarterly. Investors always optimistically or pessimistically predict the future based on past information, when the past B rises, their expectation for future B will also rise. Once they find that their optimistic or pessimistic expectations are not in line with the new disclosed B, they will overbuy or sell stocks in the opposite direction. Under this view, the anchor-twisting motion represents reversals of expectation errors, which tend to occur around earnings announcement dates following portfolio formation. The anchor-twisting motion reflects systematically optimistic and pessimistic expectations. The widespread anchor-twisting motion is due to the inefficiency of information transmission in the Chinese stock market. We suggest that China continuously improve the information disclosure system of listed companies. The contributions of this paper are summarized as follows. (1) We define the anchor-twisting motion and find it is widespread in the Chinese market. (2) By decomposing MB into market-to-value and value-to-book components, we find that the entire value premium concentrates on the value-to-book components, and the market-to-value component interferes with the measurement of the conventional MB effect. (3) We provide a standard data preprocessing program for the follow-up research of Fama and French’s factor pricing test on China’s portfolios.
刘彬, 肖文. 中国的市值账面比效应为什么不显著？[J]. 浙江大学学报(人文社会科学版), 2021, 51(3): 117-131.
Liu Bin, Xiao Wen. Why Is the Market-to-Book Effect Not Significant in China?. JOURNAL OF ZHEJIANG UNIVERSITY, 2021, 51(3): 117-131.
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