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Valuation of China's Stock Market: An Analysis of Earnings Components

This study dissects China’s stock market earnings into Core and Non-core components, revealing investor mispricing tendencies. It uncovers profit opportunities from trading based on these components. Reference is made to a related study by Gongmeng Chen, Michael Firth, and Daniel NingGao. Additionally, suggestions for future research include exploring data specifications and the impact of information environment variables on study results.

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Valuation of China's Stock Market: An Analysis of Earnings Components

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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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