Essays on stock misvaluation : a thesis presented in fulfilment of the requirement for the degree of Doctor of Philosophy in Finance at Massey University, Albany, New Zealand
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Date
2024-07-29
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Massey University
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Abstract
This thesis consists of three essays on stock misvaluation in the Chinese stock market.
The Chinese stock market is dominated by risk-seeking speculators with behavioural biases. The first essay explores whether this leads to stock misvaluation and generates return premiums. We modify a pricing deviation-based approach developed by Rhodes–Kropf et al. (2005) by adding ownership classification in benchmark regressions to measure stock misvaluation, because one feature of many Chinese companies is state-ownership. We find that the accounting variables of the pricing deviation-based approach can explain more of the within-industry variation in firm value of state-owned enterprises (SOEs) than for non-state-owned enterprises (non-SOEs). The misvaluation effect of SOEs is stronger than non-SOEs, while the misvaluation of SOEs corrects faster than that of non-SOEs. Moreover, we find that loadings on the misvaluation factor positively forecast the cross-sectional returns in the rolling-window Fama-Macbeth two-stage regressions. The misvaluation effect in the Chinese stock market is significant.
The second essay examines the effect of market constraints on stock misvaluation. A pioneering study by Chang et al. (2014) demonstrates that intensified short-selling activities, not margin-trading activities, improve price efficiency after the ban on margin trading and short selling is lifted. We find that their finding is subject to the limitation of the short sample period and the result reverses after extending the sample period to December 2020, primarily due to the soaring margin-trading activities. The imbalanced development of margin trades and short sales positively affects stock misvaluation, escalating overvaluation while reducing undervaluation. The positive effect of the imbalanced trading activities on misvaluation is primarily sourced from margin trades. We argue that margin traders are information providers whose trading activities reduce undervaluation.
The third essay investigates the relationship between firm-level environmental, social and governance (ESG) score, and stock misvaluation. We find that the ESG score is negatively and significantly related to stock misvaluation. We extend our research by analysing the three pillars of ESG, as each pillar measures different aspects of a firm. The G score is negatively associated with stock misvaluation, effectively mitigating deviations from intrinsic value for overvalued and undervalued firms. The S score causes overvaluation, while the E score does not have a significant influence on misvaluation. These findings enhance the importance of evaluating E, S and G separately. The overall ESG score may counterbalance the influence of each individual ESG pillar on stock misvaluation. Further analyses show an influencing role of ESG (G) disclosure score in the ESG(G)- misvaluation relationship. The negative effect of the ESG (G) score on misvaluation is attributed to increasing information transparency.
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Stocks, Prices, Margins (Security trading), Short selling (Securities), China, asset pricing, misvaluation, market efficiency, trading imbalance, margin trading, short selling, ESG