A test of the value relevance of financial indicators and macroeconomic factors to the performance of Chinese stock market

Abstract

This paper firstly aims to investigate how certain essential financial indicators, such as P/E ratio, P/B ratio, earning per share (EPS), and book value per share (BVPS) are associated with the Chinese stocks’ performance measured by abnormal return and price. I used two models (the P/E-P/B model and the Ohlson (1995) model) to estimate the relationship between abnormal returns and financial indicators, amidst which the first model uses the abnormal return as a dependent variable and the other uses the price as an explained variable. Secondly, the study of this paper will move from firm-specific factors to macroeconomic factors to discuss how Chinese stock prices have been affected by macroeconomic variables using a linear multi-variables model. For the analysis, five macroeconomic variables, namely the inflation rate, the M2 supply, the long-term interest rate, the exchange rate, and the expected GDP growth rate were taken into consideration. Regarding the contribution of this paper, it measures the value relevance of accounting information by testing the efficiency of the strategy that investors, with the expectation of earning abnormal return and beating the market, purchase undervalued stocks identified by low P/E and P/B ratios. Besides, this paper simultaneously considered firm specific information and macroeconomic variables and found out what kind of indicators (firm-specific indicators or macroeconomic indicators) are more influential on the performance of Chinese stock market, while previous studies solely focus on either decisive issues. Chinese investors, therefore, can get an insight from this research in whether firm-specific factors or macroeconomic factors are more reliable for decision- making.