Limits‐to‐arbitrage and asset growth anomaly in Chinese stock market

Abstract

Purpose

This paper makes attempt to test the firm‐level long‐term asset growth (LAG) effects in returns by examining the cross‐sectional relation between firm‐level LAG and subsequent abnormal stock returns. The purpose of this paper is to investigate whether limits‐to‐arbitrage can explain this asset growth anomaly in Chinese stock market.

Design/methodology/approach

Empirical research was carried out.

Findings

The empirical results show that asset growth anomaly in A‐share stock market is significant and robust. The conclusion provides more evidence for the existence of asset growth anomaly. Additionally, arbitrage risk indicated by idiosyncratic risk cannot explain the anomaly, arbitrage risk indicated by accounting information transparency can partly explain the anomaly, and arbitrage cost proxied by Amihud's measure of illiquidity indicator can completely explain the asset growth anomaly in A‐share stock market.

Research limitations/implications

The results of this paper imply that strengthening the disclosure of firm information and improving the liquidity of the market are important to improve the efficiency of the A‐share stock market.

Originality/value

The paper selects the sample of non‐financial listed companies in A‐share stock market to research the asset growth anomaly and investigates whether limits‐to‐arbitrage can explain this anomaly. This paper proves the existence of asset growth anomaly in A‐share stock market and is a good reference for further researches.

Citation

Ye, J. and Li, W. (2013), "Limits‐to‐arbitrage and asset growth anomaly in Chinese stock market", Nankai Business Review International, Vol. 4 No. 3, pp. 199-211. https://doi.org/10.1108/NBRI-07-2013-0024