Information risk, stock returns, and asset pricing: Evidence from China
Abstract
Purpose
This study aims to investigate information risk in relation to stock returns of a firm and whether information risk is priced in China.
Design/methodology/approach
The authors used accruals quality (AQ) as their measure of information risk and performed Fama-Macbeth regressions to investigate association of AQ with future realized stock returns. Moreover, two-stage cross-sectional regression analysis was performed, both at firm level and at portfolio level, to test if the AQ factor is priced in China in addition to existing factors in the Fama French three-factor model.
Findings
The authors found poor AQ being associated with higher future realized stock returns. Moreover, they found evidence of market pricing of AQ in addition to existing factors in the Fama French three-factor model. Further, subsample analysis revealed that investors value AQ more in non-state owned enterprises than in state owned enterprises.
Research limitations/implications
The study sample comprises A-shares only and the generalization of the findings is limited by the peculiar institutional and economic setup in China.
Originality/value
This study contributes to market-based accounting literature by providing further insight into how and if investors value information risk, and it seeks to fill gap in empirical literature by providing evidence from the Chinese capital market.
Keywords
Acknowledgements
The authors are thankful to the anonymous referee for providing insight.
Citation
Safdar, R. and Yan, C. (2017), "Information risk, stock returns, and asset pricing: Evidence from China", Accounting Research Journal, Vol. 30 No. 4, pp. 379-394. https://doi.org/10.1108/ARJ-04-2015-0057
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited