Jianan Liu, Robert F. Stambaugh and Yu Yuan
In: Journal of Financial Economics, Vol. 134 No. 1, pp 48-69
Liu et al. construct size and value factors in China. The size factor excludes the smallest 30% of firms, which are companies valued significantly as potential shells in reverse mergers that circumvent tight IPO constraints. The value factor is based on the earnings-price ratio, which subsumes the book-to-market ratio in capturing all Chinese value effects. Their three-factor model strongly dominates a model formed by just replicating the Fama and French (1993) procedure in China. Unlike that model, which leaves a 17% annual alpha on the earnings-price factor, their model explains most reported Chinese anomalies, including profitability and volatility anomalies.
