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Non-Tradable Share Reform, Liquidity, and Stock Returns in China

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  • Chi-Hsiou D. Hung
  • Qiuliang Chen
  • Victor Fang

Abstract

This article studies the influence of the non-tradable share reform in the cross-section of stock returns in China. Prior research has generally neglected this important development in the Chinese stock market. We find that the firm-specific illiquidity measures that reflect direct transaction costs, price impact and difficulties in trading immediacy, exhibit a positive and significant relationship with stock returns. These effects are particularly pronounced after the non-tradable share reform. Furthermore, in the post-reform era, portfolios with high illiquidity (i.e. high relative bid–ask spread, high Amihud illiquidity, low Amivest liquidity ratio) significantly outperform portfolios with low illiquidity, controlling for size, and book-to-market effects.

Suggested Citation

  • Chi-Hsiou D. Hung & Qiuliang Chen & Victor Fang, 2015. "Non-Tradable Share Reform, Liquidity, and Stock Returns in China," International Review of Finance, International Review of Finance Ltd., vol. 15(1), pages 27-54, March.
    • Handle: RePEc:bla:irvfin:v:15:y:2015:i:1:p:27-54
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    File URL: http://hdl.handle.net/10.1111/irfi.12043
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    References listed on IDEAS

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    4. Wenting Jiao & Jean-Jacques Lilti, 2017. "Whether profitability and investment factors have additional explanatory power comparing with Fama-French Three-Factor Model: empirical evidence on Chinese A-share stock market," China Finance and Economic Review, Springer, vol. 5(1), pages 1-19, December.
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    6. Xuan Vinh Vo & Hong Thu Bui, 2016. "Liquidity, liquidity risk and stock returns: evidence from Vietnam," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 9(1), pages 67-89.

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