Expected Investment Premium in China Capital Market

Di Liu (Central University of Finance and Economics, Chinese Academy of Finance and Development, China)

Article ID: 1750

DOI: https://doi.org/10.30564/jbar.v3i2.1750

Abstract


Through a measurement of corporate investment plan, i.e. expected investment cash flow growth (EICFG), which combines historical equity issuance and factors that influence firm’s future investment, this paper studies the impact of investment expectation on firm’s cross-sectional return of stock in China capital market. I document the negative correlation between EICFG and future stock return in A-share market, and find out that stocks of firms with higher growth of investment cash flow performs significantly worse than those with lower growth of investment cash flow in one year. Our long-short EICFG portfolio generates a statistically and economically significant return which cannot be captured by leading factor models. I further disentangle the covariation between EICFG and expected stock return from rational and behavioral perspective. This paper also extends the research of investment premium to investment-based asset pricing model.


Keywords


Investment premium; Expected stock return; China capital market

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