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Analysis of Valuation Discrepancies in China’s Stock Market

This study dissects China's stock market earnings into Core (CE) and Non-core (NCE) components, revealing investor underreactions to CE and overreactions to NCE. Profitable trading strategies emerge, hinting at market inefficiency. Reviews suggest replicating findings with longer data and exploring ownership impact on mispricing. Recommendations include adjusting regression specifications and studying results across different information environments.

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Analysis of Valuation Discrepancies in China’s Stock Market

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  1. Discussion of “Valuation of China’s Stock Market: Mispricing of Earnings Components” Chuan-Yang Hwang

  2. Summary • Separate Earnings of China’s stock market into Core (CE) and Non-core (NCE) components. • CE is more persistent than NCE as expected. • Investors underreact to CE and overreact to CE. • A profitable trading strategy can be constructed by long stock with hihg CE and short stocks with low NCE– Chinese stock market is not efficient.

  3. Comments (1) • Gongmeng Chen, Michael Firth &Daniel NingGao (2011):The Information Content of Earnings Components: Evidence from Chinese Stock Markets, European Accounting Review • This paper show exactly the same results listed in the summary. • It has somewhat longer data 1995-2008 (1995-2005 in this paper). • It also examine the mispricing related to ownership (private firm vs. SOE).

  4. Comments (2) • In Table 5, • Would the results hold with the following specification? • The t values in pooled regression are overstated, should use cluster standard deviation to calculate t valued . • To differentiate from the publish paper, consider studying how your results depend on information environment (such as firm size, analyst coverage).

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