Essays on asset pricing anomalies : a thesis presented in fulfilment of the requirement for the degree of Doctor of Philosophy in Finance at Massey University, Albany, New Zealand

Abstract

This thesis consists of three essays on stock return anomalies in the Chinese stock market, which is characterised by a high proportion of retail investors and relatively severe information frictions. The Chinese stock market is dominated by retail investors, whose behavioural biases are likely to give rise to stock anomaly returns. The first essay investigates the presence of such anomalies and examines whether financial information transparency reduces anomaly returns and thus enhances market price efficiency. We find that, among the 11 anomalies identified by Stambaugh et al. (2012) and Chu et al. (2020), most are persistent in the Chinese stock market. These anomalies’ returns are negatively related to information availability, proxied by a firm-level opacity measure. Notably, this effect is more pronounced in the long legs of the anomaly portfolio than in the short legs. The observed negative relationship between information opacity and anomaly returns suggests that improving firm-level information disclosure could help reduce anomaly returns and thereby enhance market price efficiency. The second essay explores the effect of market constraints on stock anomalies. The relaxation of the Chinese short-sale ban started in March 2010, expanded in steps, provides a quasi-experimental setting to investigate the influence of short-sale constraints on stock anomalies. We employ a difference-in-differences (DiD) approach to compare anomaly returns between stocks eligible and stocks ineligible for short sales during each expansion, which refers to a regulatory wave in which additional stocks became eligible for short selling. The results indicate that relaxing the short-sale constraint has heterogeneous and limited effects on anomaly returns. Furthermore, the effect is not uniform across anomalies. To better capture the intensity of short-selling activities, we construct a short-selling depth variable that isolates net shorting pressure from the margin trading effect. We find a negative relationship between short-selling depth and anomaly returns, indicating that anomaly profitability weakens as short-selling intensity increases. This result echoes the argument of Chang et al. (2014), who advocate for the development of a more robust securities lending market to promote market efficiency. The third essay examines the pricing implications of climate risk disclosure (CRD). We develop a firm-level CRD measure through textual analysis of corporate annual reports and use it to construct a novel climate-risk-disclosure-based anomaly factor. Both stock-level and portfolio-level analyses show that stocks with lower CRD scores consistently earn higher returns, and that the climate-risk-disclosure factor (FCRD) generates significant abnormal returns relative to traditional risk factors and policy uncertainty factors. These findings provide strong evidence that a CRD-characteristic-based anomaly persists in the Chinese stock market, highlighting the return predictive power of climate-related disclosure.