Finance Seminar（2015-24）

Topic: The Real Value of China’s Stock Market

Speaker: Jennifer N. Carpenter, New York University

Time: Monday, 20 July, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract: China is the world’s largest investor and greatest contributor to global economic growth by wide margins. The efficiency of its financial system in allocating capital to investment will be important to sustain this growth. This paper shows that China’s stock market has a crucial role to play. Since the reforms of the last decade, China’s stock market has become as informative about future corporate profits as in the US. Moreover, the trend of stock price informativeness over the last two decades is highly correlated with that of corporate investment efficiency. China’s stock market appears to be aggregating diffuse information and generating useful signals for managers. Although it is a segmented market, Chinese investors price risk and other stock characteristics remarkably like investors in other large economies. They pay up for large stocks, growth stocks, and long shots, and they discount for illiquidity and market risk. In addition, because of its low correlation with other stock markets and high average returns, China’s stock market offers high alpha to diversified global investors who can access it. However, this high alpha amounts to an inflated cost of equity capital, constraining the investment of China’s smaller, more profitable enterprises. Further reforms that open this market to global investors and improve stock price informativeness will be important to increase China’s investment efficiency and fuel its continued economic growth.