| China’s stock market has gone through21years since Shanghai Stock Exchange was established in1990. During this period, the investment philosophy of China’s stock market experienced the bellowing stages:institutional investors as dealers from1992to1997, co-existence of dealer pattern and value pattern from1998～2002, and value pattern as the mainstream one after2003. This is because China has encouraged the development of institutional investors and constantly improved securities regulatory environment since2003. Reform of the shareholder structure of listed companies in2005promoted the further development of value investing philosophy. At present, China’s capital market is consisted of institutional investors as National Social Security Fund, corporation pension, security investment funds, small investors and speculators.Value investing philosophy originated Graham (1934). In the book of "Security Analysis", he proposed the term "value investing" firstly. Not only had many great masters of value investment achieved success, scholars both at home and abroad confirmed value pattern could earn premium as well. The interpretation of the sources of value premium varies greatly. Most representative theories are as bellowing:additional risk compensation theory of Eugene Fama (1997), investors irrationality theory rose by Lakonishok, Shleifer and Vishny (1994,1997), and investors overreaction theory by De Bondt, Thaler (1985,1990). Based on this, this paper aims to verify the feasibility of value investment strategy in Chinese stock market and then offers explanation if value investment strategy is valid.Firstly, this paper reviews the historical evolution of value investing theory, and then introduces the basis of value investing theory—how to determine the intrinsic value of stocks. Secondly, this paper summarizes the literature review of domestic and foreign scholars on value investment strategy. Thirdly, it adopts all A stocks listed in Shanghai and Shenzhen Stock Exchanges from1998to2011, and divides them into the value portfolio and the growth portfolio in accordance with B/M and E/P ratio to test portfolio yield. The empirical results show that the value portfolio could earn excess return of0.33%and9.04%compared with growth portfolio. This paper also attempts to explain the sources of value premium by additional risk compensation theory and investors’irrationality theory. It finds out that two-factor model containing additional risk can better explain value premium and in some extent, the value premium is also supported by the contrarian model. Finally, this paper draws the conclusion based on theories and empirical result, and makes recommendations on further implementation of value investment philosophy from perspectives of investors and listed companies. |
