| Profitability refers to the ability of a firm to use existing resources to obtain profits.It is the core factor to judge the firm’s operation status and market competitiveness.In recent years,the Chinese stock market has gradually changed from the traditional approval system to the registration system,marking the further marketization of the Chinese capital market.Although the registration system does not set specific profit standards for listed firms,it emphasizes the sustainability of profits and the authenticity of financial information disclosure.In terms of the stock market’s performance,there has also been a prominent phenomenon of stock price differentiation caused by profitability differentiation recently.The Matthew effect between listed firms is gradually strengthened,the industry concentration is generally on the rise,and the industry profits are increasingly concentrated to leading firms.In addition,in the 19 th CPC National Congress report,the CPC Central Committee proposed to promote the high-quality development of the Chinese economy and make rational use of the capital market to serve the real economy.Therefore,under the background of registration system reform and accelerated market differentiation,exploring the information behind the firm’s profitability is of great practical significance for an in-depth understanding of the Chinese capital market.In the field of academic research,since Fama and French(2015)and Hou,Xue,and Zhang(2015)added the profit factor into the benchmark pricing model,profit has become an important research topic in the field of asset pricing.Profitability contains wealthy pricing information.There is a lot of information about the firm’s profitability that can be mined.Existing studies have also shown that the firm’s profitability can significantly affect the crosssectional return of stocks.However,by combing and summarizing the relevant research,it can be found that the current academic research on profitability anomalies is mostly based on a static perspective,and there is little literature to analyze the pricing information contained in profitability from a dynamic perspective.And under the background of frequent false financial disclosure of listed firms,there is no domestic research on the profitability anomalies adjusted by cash flow.Secondly,the existing relevant research usually focuses on the exploration of anomalies but often ignores the economic mechanism behind the anomalies,the research on profitability pricing mechanism is insufficient.Finally,there is a lack of research on pricing heterogeneity in different stages of firm operation and development,and there is no domestic literature to analyze the pricing logic behind the firm in combination with the firm life cycle.In view of this,this paper takes the Chinese A-share listed firms from January 2004 to May 2021 as the research sample,concentrating on the profitability anomalies of the Chinese A-share market,comprehensively analyzes the pricing information contained in the firm’s profitability from static and dynamic perspectives,and studies the economic mechanism behind the profitability anomalies and the heterogeneity of profitability effect under different life cycles.The purpose of this paper is to make a helpful supplement and expansion for the current relevant literature and to provide robust research support for changing the market investment concept,improving the effectiveness of market pricing and promoting the rational and healthy development of the Chinese capital market.Specifically,the main research contents and relevant research conclusions of this paper are summarized as follows:(1)Examining the relation of firm profitability and stock cross-sectional returns from dynamic and static perspectives.Firstly,using dynamic and static profitability variables to construct the investment portfolios and analyze the relationship between returns and profitability of according portfolios.We obtain the result that both dynamic and static profitability can be priced significantly,and the pricing effectiveness of dynamic profitability growth is higher than that of the traditional static profitability level;Meanwhile,to exclude the interference of other pricing factors on this study results,we further test the profitability pricing by bivariate grouping as well as by Fama-Mac Beth cross-sectional regression analysis.Then,using the rolling window to divide the subsamples and the performance of cumulative buying and holding returns.It verifies the stability of the pricing effectiveness of the profit strategy and proves that investors will have an insufficient response to the profit information through the long-term performance of the profit strategy.Next,in order to investigate the incremental information contained in dynamic profit,we use Fama-Macbeth regression and grouping sorting methods to control the impact of static profit,and obtain the conclusion that both dynamic profit growth and acceleration have incremental pricing information on future stock returns.After integrating the pricing information contained in dynamic and static earnings,we obtain a stronger profit pricing strategy.In addition,in the robustness test,we verified that the profitability has a significant pricing effect in the Chinese A-share market one by one throughout of sample test,factor pricing effect test,FF5,hxz4 and CH3 pricing model test and the original profit change measure test.Finally,in order to eliminate the interference of earnings management and other factors on the profitability pricing results,the paper uses the firm’s cash flow to adjust the profit and obtains the conclusion that the profit adjusted by cash flow still have significant pricing,which further proves the effectiveness of the profit pricing strategy in the Chinese A-share market.(2)Comprehensively analyzing the economic mechanism behind the profitability anomalies.This part tests the pricing mechanism of profitability premium effect from the perspective of rational pricing based on risk compensation and Q theory and irrational pricing based on behavioral finance.In the analysis of the risk compensation mechanism,this paper tests whether the risk compensation channel can explain the profitability anomalies from three aspects.Firstly,from the perspective of macro risk,this paper analyzes the relationship between the timing characteristics of profit premium and the characteristics of macro market fluctuation;Secondly,with the idea of the return decomposition,the market beta is divided into cash flow beta and discount rate beta,and then the relationship between profit anomaly and risk is analyzed;Thirdly,by constructing the profit risk mimicking factor and taking the firm profit as a proxy variable of risk,this paper analyzes whether the risk compensation can effectively explain the profit premium.None of the above tests found that the excess profit premium came from risk compensation and did not support the interpretation channel of risk compensation.For the explanation mechanism of Q theory based on investment,it believes that the profitability anomalies is related to the investment cost faced by firms.That is,under a given investment level,the investment friction of firms will weaken the positive pricing effect of firm profits on stock returns.This paper uses financing constraints to measure the degree of investment friction faced by firms,but the final empirical conclusion does not find a significant negative relationship between investment friction and profit premium,the Q theory based on investment can not effectively explain the profit premium effect.In the explanation of irrational pricing based on behavioral finance,we first use the earnings announcement and earnings surprise to indirectly verify the investors’ expectation error of firm profit in the stock market;Next,using SY and DHS mispricing models,we test that the pricing effectiveness of profit will disappear or significantly weaken in the mispricing factor model;Then,combined with some typical irrational characteristics of the Chinese A-share market,we find that there is a significant relationship between profit premium effect and irrational characteristics such as overconfidence,gambling effect and information uncertainty;In addition,combined with the influencing factors such as the proportion of institutional investors,transaction costs and liquidity,this paper further explores the relationship between investor mispricing and profitability anomalies;Finally,using the reform of margin trading system as a quasi-natural experiment,it is tested that the profit premium of the subject stock of margin trading is less than that of the non-subject stock,which further proves that the mispricing is the reason for the profitability anomalies.(3)Further analyzing the profitability anomalies in combination with the life cycle of the enterprise.Firstly,it explores the prediction ability of the firm’s profitability to the future stock returns under different life cycles.Through the combination analysis of profit,Fama-Mac Beth regression analysis and long-term cumulative income performance,this paper explores the profit pricing performance under different firm life cycles.The empirical results show that there is an inverted U-shaped evolutionary relationship between profitability and firm life cycle,and profitability shows higher pricing effectiveness in growth and maturity.According to the trend of long-term cumulative return,it can be inferred that investors have an insufficient response to the information related to firm profits,which lays a foundation for the explanation of the heterogeneity of profit effect in the life cycle based on mispricing in this paper.Then,in the robustness test,by controlling the firm’s market value and book to market value ratio,market state,and using time-series subsample test and the retained earnings equity ratio as other methods to measure the firm life cycle,it provides further supporting evidence for the profitability effect based on the firm life cycle.Finally,from the perspective of mispricing,this paper analyzes whether mispricing will lead to the heterogeneity of profit pricing in different firm life cycles.By using SUE,PEAD,mispricing score and market sentiment,it is verified that the heterogeneity of mispricing levels in different firm life cycles is the reason behind the heterogeneity of profit pricing.The main contributions of this paper are as follows:(1)further excavating the pricing information contained in profitability from a dynamic perspective.Based on the comprehensive analysis of the firm’s static profit anomaly,this paper further studies the profit anomaly from the dynamic perspective,analyzes the impact of dynamic profit on the stock cross-section return,deeply explores the pricing information contained in the firm’s profit,and enriches the research perspective of profitability anomalies in asset pricing research.(2)This paper comprehensively and deeply analyzes the pricing mechanism behind the profitability anomalies in the Chinese stock market.This paper makes an in-depth analysis of the pricing mechanism that drive profit anomalies from two aspects: the risk compensation and Q theory of rational pricing,and the mispricing of irrational pricing.By combining with the actual characteristics of the Chinese Ashare market,this paper comprehensively reveals the economic mechanism behind the value investment strategy driven by firm profit.(3)Combined with the firm life cycle,this paper further explores the anomalies in the market,deeply analyzes the pricing logic behind the operation and development of firms,explores the heterogeneity of pricing effectiveness in different life cycle stages of firms,and widens the research ideas of asset pricing.(4)Through cash flow adjustment of profit,alleviate the impact of earnings management,financial bath and other factors,which more truly reflects the situation of firm profit.At the same time,this paper also verifies that cash flow-adjusted profit still has significant pricing effectiveness in the Chinese A-share market,which provides strong support for pricing research based on profitability.Based on the main research conclusions of this paper and combined with the characteristics of the Chinese capital market,this paper suggests that: investor education should be strengthened,investors should be guided to focus on the firm’s intrinsic value,and the concept of value investment should be established;Enhancing the effectiveness of the market,and further optimizing the efficient allocation of resources by the market;The firm’s intrinsic value should be considered from multiple dimensions;Further clarifying the impact of the firm’s development stage on the pricing effectiveness;Further building the long-short trading mechanism in the Chinese market;Improving the quality of information disclosure and the efficiency of information transmission. |
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