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Financing anomaly, mispricing and cross-sectional return predictability

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  • Yang, Baochen
  • Ye, Tao
  • Ma, Yao

Abstract

This study investigates the persistence of financing anomaly in the Chinese stock market. The results show that the long-short portfolio earns an average monthly excess return of 0.88% for the following 12 months based on this anomaly. We provide a behavioral mispricing-based explanation for this anomaly that financing anomaly is stronger in stocks or period with high investor overconfidence. Moreover, we find that financing anomaly is stronger in stocks with more investor attention, indicating that excessive investor attention increases mispricing and reduces market efficiency. However, idiosyncratic volatility cannot capture the arbitrage costs faced by financing anomaly, and investors' lottery-like preference cannot explain financing anomaly. Our findings are robust after controlling for other firm characteristic variables, considering shell value contamination and different sample periods.

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  • Yang, Baochen & Ye, Tao & Ma, Yao, 2022. "Financing anomaly, mispricing and cross-sectional return predictability," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 579-598.
    • Handle: RePEc:eee:reveco:v:79:y:2022:i:c:p:579-598
    DOI: 10.1016/j.iref.2022.02.062
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