Sources of liquidity commonality, asymmetric information and ownership structure in emerging markets : evidence from the Chinese stock market

Xinwei Zheng examines if common factors of liquidity can be determined by ownership structure measured by asymmetric information in an emerging market that has adopted an order-driven trading system. Using China as a case for the study, I select a broad sample of stocks from two separate Chinese stock exchanges to measure and
analyse the relationship. My empirical evidence seems significant and pervasive. These findings about the Chinese stock market provide useful pointers for understanding commonality in emerging economies and shed critical light
on a new dimension of the working of emerging markets.

Market liquidity risk factor and financial market anomalies : evidence from the Chinese stock market

The Chinese stock market is an order-driven market and hence its characteristics are structurally different from quote-driven markets. There are no studies that consider the role of the market liquidity risk factor in determining cross-sectional stock returns in a model including financial market anomalies for order-driven markets. Our aim is to test whether financial market anomalies such as firm size, the book-to-market ratio, the turnover rate, and momentum both with and without the inclusion of the market liquidity risk factor in the case of the Chinese stock market can explain cross-sectional stock returns. The empirical framework is based on the model proposed by Avramov and Chordia (AC, 2006). Our main finding is that the AC model can capture financial market anomalies except momentum when we include the market liquidity risk factor on the Chinese stock market.

Voluntary disclosure in a changing regulatory environment : evidence from Chinese stock market

This paper investigates the voluntary disclosure made by 297 Chinese listed firms in their 1995-2006 annual reports. It aims to determine how firms in the Chinese stock market have responded to the coercive pressure exerted upon them by the market regulatory body, the Chinese Security Regulatory Commission (CSRC) in terms of providing transparent information to the stock market. The findings show that over the study period, listed firms have gradually increased their voluntary disclosure. This paper also explores the main characteristics of voluntary disclosure made by listed firms in the Chinese stock market. It is concluded that voluntary disclosure has been adopted by firms to achieve institutional legitimacy in the stock market.

Developing economies and the emergence of new stakeholder group: an examination of stakeholders in the Chinese stock market

As a consequence of the development of the Chinese economy, there has been an emergence of “new” stakeholder groups for the Chinese listed firms. New stakeholder groups include creditors, regulatory agencies, private investors, professional associations and environmentalists. With the use of secondary data, a review was undertaken to explore the emergence of these new stakeholder groups and discuss their influence over listed firms in China. The stakeholder typology developed by Mitchell et al (1997) is used to identify stakeholder attributes of each stakeholder group and assess their stakeholder power. The changes of stakeholder power over the years mirror China’s transition from a centrally planned economy to a more market oriented one.

Time-varying herding behavior, global financial crisis, and the Chinese stock market

In this paper, we examine the evidence of herding behavior on the Chinese stock market. Our main findings are as follows. First, we find strong evidence of herding behavior on both the Shanghai and Shenzhen stock exchanges. Second, we document evidence of asymmetric herding behavior with greater magnitude of herding behavior on up markets than on down markets. Third, our findings suggest that herding behavior is sector-specific and predominant in the industrial and properties sectors. Finally, we unravel strong evidence suggesting that herding behavior is time-varying and in some sectors time-varying herding behavior is more prevalent than in other sectors.

Initiation of trades on the Chinese stock market

The flow of orders from buyers and sellers, relative to past returns and stock characteristics, was examined in the Chinese stock market. Order imbalance (the gap between buyer-and seller-initiated trades) was found to be negatively related to long term returns. Turn of the calendar year trading provided strong indications of tax-motivated trading as well as support for the flight-to-quality hypothesis, which suggests selling in response to perceived increases in market risk.

Some hypotheses on commonality in liquidity: new evidence from the Chinese stock market

In this article, we examine four specific hypotheses relating to commonality in liquidity on the Chinese stock markets. These hypotheses are (1) that market-wide liquidity determines liquidity of individual stocks; (2) that liquidity varies with firm size; (3) that sectoral-based liquidity affects individual stock liquidities differently; and (4) that commonality in liquidity has an asymmetric effect. Drawing on a two-year data set on the Shanghai and Shenzhen stock exchanges comprising over 34 million and 48 million transactions, respectively, we find strong support for commonality in liquidity and a greater influence of industry-wide liquidity in explaining liquidity of individual stocks. Moreover, our results suggest that of the three main sectors - financial, industrial, and resources - the industrial sectors liquidity is most important in explaining individual stock liquidities. Finally, we do not find any evidence of size effects and document an asymmetric effect of market-wide liquidity on liquidity of individual stocks.

Ultimate controlling shareholders and dividend payout policy in Chinese stock market

Departing from the traditional cash flow rights-dividend policy framework, this study investigates whether the level of control rights and the types of ultimate controlling shareholders (UCSs) of listed firms in China influence their cash dividend payout. We find that the level of control rights is positively associated with both the probability to pay and the level of cash dividend payout, which indicates that UCSs use cash dividends to reduce the agency cost of free cash flow and redirect listed firms' cash balance. Furthermore, different types of UCSs influence dissimilarly on the controlled firms' cash dividends, which can be attributed to the backgrounds of these UCSs originating from China's unique partial share issuance privatization process.

Do order imbalances predict Chinese stock returns? New evidence from intraday data

In this paper we examine whether order imbalances can predict the Chinese stock market returns. We use intraday data, a panel data predictive regression model that accounts for persistent and endogenous order imbalances and cross-sectional dependence in returns, and show that order imbalances predict stock returns from 1-minute trading to 90-minute trading. On the basis of this predictability evidence using multiple trading strategies we show that profits persist during the day. These results imply that a source of Chinese market inefficiency is order imbalances.

The debt, the stock market and the state-owned enterprises. The sources of chaos on the Chinese financial markets. OSW Commentary NUMBER 201/16.03.2016

The government’s extensive programme for stimulating the economy has enabled China to maintain high economic growth after the global financial crisis in 2008. However, this success has come at the price of a number of negative economic phenomena and the consequences they have had are the major challenge for the government today. The vast programme of investments in infrastructure, construction and fixed assets, which has been the main source of economic growth over the past few years, has caused a rapid increase in China’s debt from 158% of GDP in 2007 to 282% in 2014. Along with the local governments in charge of implementing the programme, the Chinese sector of state-owned enterprises (SOEs) has been heavily burdened by the stimulation policy. The sector’s profitability has fallen, its indebtedness has increased and management problems have been revealed.

Momentum and seasonality in Chinese stock markets

In this paper, we follow Jegadeesh and Titman's (1993, Journal of Finance) approach to examine 25 momentum/contrarian trading strategies using monthly stock returns in China for the period from 1994 to 2007. Our results suggest that there is no momentum profitability in any of the 25 strategies. In contrast, there is some evidence of reversal effects where the past winners become losers and past losers become winners afterward. The contrarian profit is statistically significant for the strategies using short formation and holding periods, especially for the formation periods of 1 to 3 months and the holding periods of 1 to 3 months. The contrarian strategies can generate about 12% per annum on average. Moreover, we follow Heston and Sadka (2008, Journal of Financial Economics) to investigate where there is any seasonal pattern in the cross-sectional variation of average stock returns in our momentum/contrarian strategies. There is no evidence of any seasonal pattern, and the results are robust to different formation and holding periods.

Testing for stock return predictability in a large Chinese panel

This paper proposes a simple panel data test for stock return predictability that is flexible enough to accommodate three key salient features of the data, namely, predictor persistency and endogeneity, and cross-sectional dependence. Using a large panel of Chinese stock market data comprising more than one million observations, we show that most financial and macroeconomic predictors are in fact able to predict returns. We also show how the extent of the predictability varies across industries and firm sizes.