In Search Of Profitability Premium And Accrual Anomaly In Chinese Stock Market

In the past decades,there has been explosive anomaly literature based on the stock market.Among them,profitability premium and accrual anomaly are anomalies closely related to accounting information.Missing risk factors,mispricing,sample selection bias,data snooping bias and a new hypothesis "(very)noisy proxy" have been proposed as competing explanations for those stock return anomalies.This paper tests hypothesis above with a total of 32 profitability and accruals measures based on Chinese A-share stock market from 1995 to 2020.This paper adopts portfolio analysis,regression analysis and profitability score method in search of profitability premium and accrual anomaly in Chinese stock market and explores the reasons behind those phenomena.Despite some individual measures(e.g.gross profit/market value of total equity,gross profit/book value of total assets)yield economically significant hedge portfolio return spread,few attain statistical significance.Meanwhile,the profitability premium stands out in medium and large companies compared to small companies.This paper concludes that there isn’t significant profitability premium and accrual anomaly in Chinese stock market.Reason for the phenomenon is that profitability are noisy proxies and those yielding significant hedge portfolio return spread have comparatively high signal-to-noise ratio.Then this paper conducts a series of robustness check:1.use annual stock return instead of monthly stock return as dependent variable,2.use the industry-adjusted profitability index as independent variable,3.use the three-year average of historical profitability index as independent variable,4.limit the sample period to July 2001 to June 2020,5.only include loss companies,6.only include ST&PT firms,7.exclude ST&PT firms.The results show that the main conclusion still holds and previous empirical evidence about profitability premium in Chinese stock market is partly due to the sample selection bias.To sum up,this empirical research depicts profitability comprehensively with 32 indexes,finds that there is no significant profitability premium and accrual anomaly in Chinese stock market,and discovers that previous empirical evidence in Chinese stock market is partly due to sample selection bias.Theoretically,this research complements and enriches relevant literature.Practically,the findings can help investors have a better understanding of profitability and make wiser decision.Ultimately,the efficiency of our capital market can be improved.