The Functionality of Book-to-Market Ratio in Chinese Markets

Larry Li, Adela McMurray, Bo Liu


We investigate the question whether the book to market ratio acts as a “risk-based” or “mispricing-based” proxy for share price formation in Chinese markets. We find that a strong relationship is observed between the firms’ book to market ratio and stock returns both in current and following years, while we cannot find a steady relationship between market leverage ratio and stock returns. In addition, the findings support the notion that a mispricing-based explanation is more plausible in China due to the speculative features of the Chinese markets.

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International Research in Economics and Finance  ISSN 2529-8038 (Print)  ISSN 2591-734X (Online)

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