Value Investment: Evidence From China's A-share Market

For many years, scholars and investment professionals have argued that value stocks outperform growth stocks in most developed markets and emerging markets. And there are two explanations for the value premium. With the high development of the Chinese stock market, value strategies attract increasing attention. This article forms value stock portfolios and growth stock portfolios based on P/E, P/B, P/S, P/C and WASG, and gives a comprehensive research on value strategies in Chinese stock market. On the one hand, by applying one-dimensional classification and two-dimensional classification, we illustrate the excess return of value stock portfolio to growth portfolio. Then we make regression of stock returns on value variables to identify which of these variables have significant impact on stock returns. And we also give the explanations for value strategy by employing CAPM model and Two-Factor. On the other hand, we exploit whether value strategies are widely employed by investors in the Chinese stock market and its explanations. We form institutional investor portfolio and individual investor portfolio, and compare returns of the two portfolios to value stock portfolio and growth stock portfolio, then we study the deciles of value variables of the two portfolios. Our research argue that, value stock portfolios outperform growth stock portfolios in the Chinese stock market, and the value premium springs from the higher risk of value stocks to growth stocks. We also find that, both institutional investors and individual investors prefer growth stocks, which may originate from short-horizon, overconfident of institutional investors and irrational behaviors of individual investors.